3734 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

1For simplicity, this release focuses on mutual

funds (i.e., open-end funds). The amendments we

are adopting, however, apply to all management

investment companies, except where noted.

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 239, 240, 270 and 274

[Release Nos. 33–7932; 34–43786; IC–

24816; File No. S7–23–99]

RIN 3235–AH75

Role of Independent Directors of

Investment Companies

AGENCY: Securities and Exchange

Commission.

ACTION: Final rule.

SUMMARY: The Commission is adopting

amendments to certain exemptive rules

under the Investment Company Act of

1940 to require that, for investment

companies that rely on those rules:

independent directors constitute a

majority of their board of directors;

independent directors select and

nominate other independent directors;

and any legal counsel for the

independent directors be an

independent legal counsel. We also are

adopting amendments to our rules and

forms to improve the disclosure that

investment companies provide about

their directors. These amendments are

designed to enhance the independence

and effectiveness of boards of directors

of investment companies and to better

enable investors to assess the

independence of those directors.

DATES: Effective Date: February 15,

2001, except that the rescission of

§ 270.2a19–1 under the Investment

Company Act will become effective May

12, 2001.

Compliance Date: Section III of this

release contains information on

compliance dates.

FOR FURTHER INFORMATION CONTACT: For

information regarding the Investment

Company Act rule amendments, contact

Jaea F. Hahn, Attorney, Martha B.

Peterson, Special Counsel, or C. Hunter

Jones, Assistant Director, Office of

Regulatory Policy, (202) 942–0690, or

regarding the disclosure amendments,

contact Kimberly Browning, Attorney,

Peter M. Hong, Special Counsel, or

Kimberly Dopkin Rasevic, Assistant

Director, Office of Disclosure

Regulation, (202) 942–0721, at the

Division of Investment Management,

Securities and Exchange Commission,

450 5th Street, NW., Washington, DC

20549–0506.

SUPPLEMENTARY INFORMATION: The

Securities and Exchange Commission

(the ‘‘Commission’’) is adopting new

rules 2a19–3 [17 CFR 270.2a19–3], 10e–

1 [17 CFR 270.10e–1], and 32a–4 [17

CFR 270.32a–4] and amendments to

rules 0–1 [17 CFR 270.0–1], 10f–3 [17

CFR 270.10f–3], 12b–1 [17 CFR

270.12b–1], 15a–4 [17 CFR 270.15a–4],

17a–7 [17 CFR 270.17a–7], 17a–8 [17

CFR 270.17a–8], 17d–1 [17 CFR

270.17d–1], 17e–1 [17 CFR 270.17e–1],

17g–1 [17 CFR 270.17g–1], 18f–3 [17

CFR 270.18f–3], 23c–3 [17 CFR 270.23c–

3], 30d–1 [17 CFR 270.30d–1], 30d–2

[17 CFR 270.30d–2], and 31a–2 [17 CFR

270.31a–2] under the Investment

Company Act of 1940 [15 U.S.C. 80a]

(‘‘Investment Company Act’’ or ‘‘Act’’);

amendments to Forms N–1A [17 CFR

274.11A], N–2 [17 CFR 274.11a–1], and

N–3 [17 CFR 274.11b] under the

Investment Company Act and the

Securities Act of 1933 [15 U.S.C. 77a–

aa] (‘‘Securities Act’’); and amendments

to Schedule 14A [17 CFR 240.14a–101]

under the Securities Exchange Act of

1934 [15 U.S.C. 78a–mm] (‘‘Exchange

Act’’). The Commission also is

rescinding rule 2a19–1 under the

Investment Company Act [17 CFR

270.2a19–1].

Table of Contents

Executive Summary

I. Background

II. Discussion

A. Amendments to Exemptive Rules to

Enhance Director Independence and

Effectiveness

1. Independent Directors as a Majority of

the Board

2. Selection and Nomination of

Independent Directors

3. Independent Legal Counsel

B. Limits on Coverage of Directors under

Joint Insurance Policies

C. Independent Audit Committees

D. Qualification as an Independent

Director

1. Ownership of Index Fund Securities

2. Affiliation with a Broker-Dealer

E. Disclosure of Information about Fund

Directors

1. Basic Information

2. Ownership of Equity Securities in Fund

Complex

3. Conflicts of Interest

4. Board’s Role in Fund Governance

5. Separate Disclosure

6. Technical and Conforming Amendments

F. Recordkeeping Regarding Director

Independence

III. Effective Date; Compliance Dates

IV. Cost-Benefit Analysis

V. Effects on Efficiency, Competition and

Capital Formation

VI. Paperwork Reduction Act

VII. Summary of Final Regulatory Flexibility

Analysis

VIII. Statutory Authority

Text of Final Rules and Forms

Executive Summary

The Commission is adopting new

rules and amendments to rules and

forms to enhance the independence and

effectiveness of independent directors of

investment companies (‘‘funds’’). First,

we are adopting amendments to require,

for funds relying on certain exemptive

rules, that:

• Independent directors constitute a

majority of the fund’s board of directors;

• Independent directors select and

nominate other independent directors;

and

• Any legal counsel for the fund’s

independent directors be an

independent legal counsel.

Second, the rules and amendments:

• Prevent qualified individuals from

being unnecessarily disqualified from

serving as independent directors;

• Protect independent directors from

the costs of legal disputes with fund

management;

• Permit us to monitor the

independence of directors by requiring

funds to keep records of their

assessments of director independence;

• Temporarily suspend the

independent director minimum

percentage requirements if a fund falls

below a required percentage due to an

independent director’s death or

resignation; and

• exempt funds from the requirement

that shareholders ratify or reject the

directors’ selection of an independent

public accountant, if the fund

establishes an audit committee

composed entirely of independent

directors.

Finally, we are requiring that funds

provide better information about

directors, including:

• Basic information about the identity

and business experience of directors;

• Fund shares owned by directors;

• Information about directors that

may raise conflict of interest concerns;

and

• The board’s role in governing the

fund.

Together, these new rules and

amendments are designed to reaffirm

the important role that independent

directors play in protecting fund

investors, strengthen their hand in

dealing with fund management,

reinforce their independence, and

provide investors with greater

information to assess the directors’

independence.

I. Background

Mutual funds are organized as

corporations, trusts, or limited

partnerships under state laws, and thus

are owned by their shareholders,

beneficiaries, or partners.1 Like other

types of corporations, trusts, or

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3735

2See generally James M. Storey & Thomas M.

Clyde, Mutual Fund Law Handbook § 7.2 (1998);

Allan S. Mostoff & Olivia P. Adler, Organizing an

Investment Company—Structural Considerations,

in The Investment Company Regulation Deskbook

§ 2.4 (Amy L. Goodman ed., 1997).

3As a result of their extensive involvement, and

the general absence of shareholder activism,

investment advisers typically dominate the funds

they advise. See Role of Independent Directors of

Investment Companies, Investment Company Act

Release No. 24082 (Oct. 14, 1999) [64 FR 59826

(Nov. 3, 1999)] (‘‘Proposing Release’’) at n.10 and

accompanying text.

4An investment adviser’s shareholders often have

an interest in a mutual fund that is quite different

from the interests of the fund’s own shareholders.

For example, while fund shareholders ordinarily

prefer lower fees (to achieve greater returns),

shareholders of the fund’s investment adviser might

want to maximize profits through higher fees. See

Proposing Release, supra note 3, at nn.11–25 and

accompanying text, for a discussion of the

comprehensive regulatory scheme established by

the Act to address conflicts of interest between

funds and their investment advisers.

5We refer to directors who are not ‘‘interested

persons’’ of the fund as ‘‘independent directors’’ or

‘‘disinterested directors.’’ See section 2(a)(19) of the

Act [15 U.S.C. 80a–2(a)(19)](defining ‘‘interested

person’’).

6The Investment Company Act establishes a

system of ‘‘checks and balances,’’ and relies on

independent directors to ‘‘oversee the fund’s

operations so as to prevent abuses of investors.’’

James M. Storey & Thomas M. Clyde, The Uneasy

Chaperone 34 (2000). Directors also have broad

responsibilities to monitor compliance with

securities, corporate and other laws. Robert A.

Robertson, Board Oversight of Mutual Fund

Compliance Operations, Rev. Sec. & Comm. Reg.,

Oct. 24, 2000, at 1.

7For example, in Japan, funds may be structured

only in the form of securities investment trusts,

which are primarily subject to regulation under the

Securities Investment Trust Law. There is no board

of directors or board of trustees, and under the

Securities Investment Trust Law, a ‘‘trustor

company’’ manages the trust assets on behalf of the

beneficiaries of the trust. The Japanese Ministry of

Finance approves the terms and conditions of

securities investment trusts, and plays a

supervisory role in the day-to-day operations of the

trusts. See Yoshiki Shimada et al., Regulatory

Frameworks for Pooled Investment Funds: A

Comparison of Japan and the United States, 38 Va.

J. Int’l L. 191 (1998).

8See Proposing Release, supra note 3, at nn.24–

25 and accompanying text.

9Approximately 82.8 million individuals in 48.4

million households in the United States invest in

funds. Investment Company Institute, Mutual Fund

Fact Book 41 (2000).

10See SEC, Notice of Sunshine Act Meetings (Feb.

18, 1999) [64 FR 8632 (Feb. 22, 1999)]; see also

Transcripts from the Roundtable on the Role of

Independent Investment Company Directors, Feb.

23–24, 1999 [‘‘Roundtable Transcripts’’]. The

Roundtable Transcripts are available to the public

in the Commission’s public reference room and the

Commission’s Louis Loss Library. They are also

available on the Commission’s Internet web site

<http://www.sec.gov/offices/invmgmt/

rountab.htm>.

11See Proposing Release, supra note 3.

12The comment letters and a summary of the

comments prepared by Commission staff are

available for public inspection and copying in the

Commission’s Public Reference Room, 450 Fifth

Street, N.W., Washington, D.C. (File No. S7–23–99).

The comment summary is also available on the

Commission’s Internet web site <http://

www.sec.gov/rules/extra/brownin1.htm>.

13See Investment Company Institute, Report of

the Advisory Group on Best Practices for Fund

Directors: Enhancing a Culture of Independence

and Effectiveness (June 24, 1999).

14See, e.g., Arthur Levitt, Chairman, SEC,

Remarks at the Mutual Fund Directors Education

Council Conference (Feb. 17, 2000) (transcript

available at <http://www.sec.gov/news/speeches/

spch346.htm>); Paul Roye, Director, Division of

Investment Management, SEC, What Does It Take

To Be an Effective Independent Director of a Mutual

Fund?, Address at the ICI Workshop for New Fund

Directors (Apr. 14, 2000) (transcript available at

<http://www.sec.gov/news/speeches/

spch364.htm>).

15Members of the Council include independent

directors, corporate governance experts, investor

advocates, academics, industry members, and

investment management attorneys.

partnerships, a mutual fund must be

operated for the benefit of its owners.2

Unlike most business organizations,

however, mutual funds are typically

organized and operated by an

investment adviser that is responsible

for the day-to-day operations of the

fund. In most cases, the investment

adviser is separate and distinct from the

fund it advises, with primary

responsibility and loyalty to its own

shareholders.3 The ‘‘external

management’’ of mutual funds presents

inherent conflicts of interest and

potential for abuses that the Investment

Company Act and the Commission have

addressed in different ways.4

One of the ways that the Act

addresses conflicts between advisers

and funds is by giving mutual fund

boards of directors, and in particular the

disinterested directors,5 an important

role in fund governance.6 In relying on

fund boards to represent fund investors

and protect their interests, Congress

avoided the more detailed regulatory

provisions that characterize other

regulatory schemes for collective

investments.7 The Commission has

similarly relied extensively on

independent directors in rules we have

adopted that exempt funds from

provisions of the Act.8

Millions of Americans are today

invested in mutual funds, which have

experienced a tremendous growth in

popularity over the past twenty years.9

In light of this growth, and our growing

reliance on independent directors to

protect fund investors, last year we

undertook a review of the governance of

investment companies, the role of

independent directors, our rules that

rely on oversight by independent

directors, and the information that

funds are required to provide to

shareholders about their independent

directors.

We held a Roundtable discussion at

which independent directors, investor

advocates, executives of fund advisers,

academics, and experienced legal

counsel offered a variety of perspectives

and suggestions.10 After evaluating the

ideas and suggestions offered by

Roundtable participants last year, we

proposed a package of rule and form

amendments that were designed to

reaffirm the important role that

independent directors play in protecting

fund investors, strengthen their hand in

dealing with fund management,

reinforce their independence, and

provide investors with better

information to assess the independence

of directors.11

We received 142 comment letters on

our proposals, including 86 letters from

independent directors.12 Commenters

generally commended our efforts to

enhance the independence and

effectiveness of fund directors, although

many offered recommendations for

improving portions of the proposals.

Many of these letters were helpful to us

in formulating the final rules and

amendments, which we are today

adopting.

We have reason to believe that our

efforts to improve the governance of

mutual funds on behalf of mutual fund

investors have already borne fruit. Our

Roundtable discussions and proposed

rules have provoked a great deal of

discussion among directors, advisers,

counsel, and investors about governance

practices and policies. After our

Roundtable, an advisory group

organized by the Investment Company

Institute (‘‘ICI’’) made recommendations

regarding fund governance in a ‘‘best

practices’’ report (‘‘ICI Advisory Group

Report’’).13 Many boards, we

understand, have adopted the

recommendations set forth in the ICI

Advisory Group Report. Some groups of

independent directors have hired

independent counsel for the first time.

Director nomination and selection

procedures have been revised.

During the last year, Commissioners

and members of the staff began meeting

with independent directors and sharing

ideas and concerns regarding the

governance of mutual funds.14 Former

Commission Chairman David Ruder

established the Mutual Fund Directors

Education Council, a broad-based group

of persons interested in fund

governance and operations,15 whose

purpose is to foster the development of

educational activities designed to

promote the efficiency, independence,

and accountability of independent fund

directors. The American Bar Association

formed a task force to examine the role

of counsel to independent directors, and

the task force released a report offering

guidance to counsel and fund directors

3736 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

16ABA, Report of the Task Force on Independent

Director Counsel, Subcommittee of Investment

Companies and Investment Advisers, Committee on

Federal Regulation of Securities, Section of

Business Law: Counsel to the Independent Directors

of Registered Investment Companies (Sept. 8, 2000).

17The Exemptive Rules are:

Rule 10f–3 (permitting funds to purchase

securities in a primary offering when an affiliated

broker-dealer is a member of the underwriting

syndicate);

Rule 12b–1 (permitting use of fund assets to pay

distribution expenses);

Rule 15a–4(b)(2) (permitting fund boards to

approve interim advisory contracts without

shareholder approval where the adviser or a

controlling person receives a benefit in connection

with the assignment of the prior contract);

Rule 17a–7 (permitting securities transactions

between a fund and another client of the fund’s

adviser);

Rule 17a–8 (permitting mergers between certain

affiliated funds);

Rule 17d–1(d)(7) (permitting funds and their

affiliates to purchase joint liability insurance

policies);

Rule 17e–1 (specifying conditions under which

funds may pay commissions to affiliated brokers in

connection with the sale of securities on an

exchange);

Rule 17g–1(j) (permitting funds to maintain joint

insured bonds);

Rule 18f–3 (permitting funds to issue multiple

classes of voting stock); and

Rule 23c–3 (permitting the operation of interval

funds by enabling closed-end funds to repurchase

their shares from investors).

18We discuss each of these conditions below. See

infra Sections II.A.1, II.A.2, and II.A.3.

19We have revised the amendments to rule 15a–

4, which permits fund boards to approve interim

advisory contracts without shareholder approval.

Funds have relied on that rule when an advisory

contract terminated in unforeseeable circumstances,

such as the death of the fund’s investment adviser.

After we issued the Proposing Release, we amended

rule 15a–4 to further permit interim advisory

contracts in foreseeable circumstances, when an

adviser or controlling person receives a benefit in

connection with the termination of the prior

advisory contract (e.g., in the context of an adviser

merger). See Temporary Exemption for Certain

Investment Advisers, Investment Company Act

Release No. 24177 (Nov. 29, 1999) [64 FR 68019

(Dec. 6, 1999)]. Three commenters argued that the

availability of the rule in unforeseeable

circumstances should not depend on the fund’s

compliance with the conditions that we proposed

to add to the Exemptive Rules. In addition, one

commenter further argued that funds that do not

comply with the new conditions could be

constrained from terminating an adviser because

they are unable to enter into an interim advisory

contract without obtaining an exemptive order. In

light of these comments, we have determined to

amend only the paragraph of rule 15a–4 that

permits interim advisory contracts in foreseeable

circumstances. See rule 15a–4(b)(2).

20As we noted in the Proposing Release, the

Exemptive Rules provide exemptive relief that

affords funds increased flexibility, cost reductions,

and the ability to operate for the maximum benefit

of investors. At the same time, these rules involve

inherent conflicts of interest between funds and

their managers, and therefore rely on independent

directors to monitor those conflicts. While the

Exemptive Rules have greatly expanded the

responsibilities of fund boards, most have not

contained conditions to enhance director

independence and effectiveness. See Proposing

Release, supra note 3, at n.30 and accompanying

text. In the future we will be reluctant to issue

exemptive orders premised on the oversight of

independent directors, if the fund does not meet the

new conditions we are today adopting.

21The independent directors thus would need to

comprise more than half of the membership of the

board. The Investment Company Act generally

requires that independent directors constitute at

least 40 percent of the board. Section 10(a) of the

Act (15 U.S.C. 80a–10(a)). Section 10(b)(2) of the

Act (15 U.S.C. 80a–10(b)(2)) requires, in effect, that

independent directors comprise a majority of a

fund’s board if the fund’s principal underwriter is

an affiliate of the fund’s adviser. Section 15(f)(1) of

the Act (15 U.S.C. 80a–15(f)(1)) provides a safe

harbor for the sale of an advisory business if

directors who are not interested persons of the

adviser constitute at least 75 percent of a fund’s

board for at least three years following the

assignment of the advisory contract.

22See Proposing Release, supra note 3, at text

following n.44.

23See Proposing Release, supra note 3, at nn.36–

44 and accompanying text.

24See Burks v. Lasker, 441 U.S. 471, 484 (1979)

(discussing the ‘‘independent watchdog’’ function

of independent directors).

25 In the Proposing Release, we proposed two

alternative board composition standards: (i) a

simple majority and (ii) a two-thirds supermajority,

as recommended by the ICI Advisory Group Report.

We are adopting a simple majority independence

standard, which most commenters supported.

26See infra Section II.A.2 (Selection and

Nomination of Independent Directors).

27Without the relief provided by rule 10e–1, the

consequence of losing an independent director and

failing to have a majority of independent directors

would be significant and immediate because funds

would lose the ability to rely on the Exemptive

Rules.

regarding standards of independence for

counsel, and guidelines for reducing

potential conflicts of interest (‘‘ABA

Task Force Report’’).16 All of these

initiatives have focused attention on the

important role of independent directors,

and their importance in promoting and

protecting the interests of fund

shareholders.

II. Discussion

A. Amendments to Exemptive Rules To

Enhance Director Independence and

Effectiveness

We are amending ten rules that

exempt funds and their affiliates from

certain prohibitions of the Act (the

‘‘Exemptive Rules’’).17 As discussed

further below, the amendments add

conditions to the Exemptive Rules to

require that, for funds that rely on the

rules, (i) independent directors

constitute a majority of the board, (ii)

independent directors select and

nominate other independent directors,

and (iii) any legal counsel for the

independent directors be an

independent legal counsel.18

Most commenters supported our goal

of enhancing the independence and

effectiveness of independent directors of

funds that choose to rely on the

Exemptive Rules.19 Some commenters

questioned the need to amend the rules,

because each rule already requires

independent directors to separately

approve some of the fund’s activities

under the rule. We selected these rules

because they require the independent

judgment and scrutiny of independent

directors in overseeing activities that are

beneficial to funds and investors, but

involve inherent conflicts of interest

between the funds and their managers.20

The amendments are designed to

increase the ability of independent

directors to perform their important

responsibilities under each of these

rules.

1. Independent Directors as a Majority

of the Board

(a) Board Composition Requirements

We are amending the Exemptive

Rules to require that the boards of funds

relying on the rules have a majority of

independent directors.21 A majority

requirement will permit, under state

law, the independent directors to

control the fund’s ‘‘corporate

machinery,’’ i.e., to elect officers of the

fund, call meetings, solicit proxies, and

take other actions without the consent

of the adviser.22 As a result,

independent directors who comprise the

majority of a board can have a more

meaningful influence on fund

management and represent shareholders

from a position of strength.23 In short,

a board with a majority of independent

directors can be more effective in

representing investors than a board with

a majority of ‘‘inside’’ directors.24

Commenters were supportive of this

proposal.25

We are allowing funds ample time to

implement the new majority

independence condition. The

compliance date for the majority

independence condition is July 1, 2002.

Although most funds already have a

majority of independent directors, the

transition period will allow sufficient

time for those that do not, to carry out

the selection, nomination, and election

of new independent directors in

accordance with the amended rules.26

(b) Suspension of Board Composition

Requirements

We are adopting new rule 10e–1,

which temporarily suspends the board

composition requirements of the Act

and our rules, if a fund fails to meet

those requirements because of the death,

disqualification, or bona fide resignation

of a director. For a fund that relies on

one or more of the Exemptive Rules,

rule 10e–1 will provide relief if the fund

no longer has a majority of independent

directors because of the sudden loss of

one or more directors.27

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3737

28Section 10(e) of the Act [15 U.S.C. 80a–10(e)]

currently suspends the Act’s board composition

requirements for 30 days, if a fund’s board may fill

a director vacancy, or 60 days, if a shareholder vote

is required to fill a vacancy. Section 10(e) also

authorizes the Commission to issue rules or orders

prescribing longer periods for filling board

vacancies.

29The time periods begin to run when the fund

no longer meets the applicable board composition

requirement, even if the fund is not yet aware that

it no longer meets the requirement. Funds and

directors should be mindful of their responsibilities

to maintain the required percentage of independent

directors, and should monitor director

independence (and other composition issues)

accordingly. A fund also could avoid problems

posed by the time constraints of rule 10e-1 by

maintaining a greater percentage of independent

directors than the simple majority required by the

Exemptive Rules. See ICI Advisory Group Report,

supra note 13, at 10–12 (recommending as a best

practice that funds have a two-thirds majority of

independent directors).

30Selection and nomination refers to the process

by which board candidates are researched,

recruited, considered, and formally named.

31Rules 12b–1 and 23c–3 already require funds

relying on those rules to commit the selection and

nomination of independent directors to the

discretion of those directors. We are amending rules

12b–1 and 23c–3 to conform their language

regarding self-selection and nomination to the

language of the other Exemptive Rules.

32See Kenneth E. Scott, What Role Is There for

Independent Directors of Mutual Funds?, 2 Vill. J.L.

& INV. MGMT. 1, 4 (2000) (‘‘Independence [of a

director] is a reflection of how you got on the board

and how you can be taken off.’’). The self-selection

and self-nomination condition applies

prospectively, i.e., to independent directors elected

after the effective date of the rules. Thus, current

independent directors who were not selected and

nominated by other independent directors may

continue to serve as independent directors until the

end of their terms, but any new independent

directors must be selected and nominated by the

incumbent independent directors. See Proposing

Release, supra note 3, at n.69 and accompanying

text.

33See The Robinson Humphrey Co., Inc., SEC NoAction Letter (Sept. 4, 1976) (analyzing the term

‘‘selected and proposed for election’’ in section

16(b) of the Act (15 U.S.C. 80a–16(b)) and

concluding that independent directors had not been

properly selected by other independent directors).

34See amended rules 10f–3(b)(11)(ii); 12b–1(c)(2);

15a–4(b)(2)(vii)(B); 17a–7(f)(2); 17a–8(c)(2); 17d–

1(d)(7)(v)(B); 17e–1(c)(2); 17g–1(j)(3)(ii); 18f–3(e)(2);

and 23c–3(b)(8)(ii). We rely on the concept of

‘‘independence’’ both in this rule and in our auditor

independence rule. See Revision of the

Commission’s Auditor Independence Requirements,

Securities Act Release No. 7919 (Nov. 21, 2000) (65

FR 76008 (Dec. 5, 2000)) (adopting release);

Revision of the Commission’s Auditor

Independence Requirements, Securities Act Release

No. 7870 (June 30, 2000) (65 FR 43148 (July 12,

2000)) (proposing release). It is important to note,

however, that we use the concept in distinct ways

in these two rules. In adopting amendments to the

auditor independence rule, our goal was to reduce

the potential for conflicts of interest that impair the

auditor’s ability to conduct an objective and

impartial audit. Under rules of professional

responsibility, attorneys have an obligation

zealously to represent their clients. See Model Code

of Professional Responsibility EC 7–1; see also

Model Rules of Professional Conduct [‘‘ABA Model

Rules’’] Rules 1.2(d), 1.3 and 3.1 (1998). With

respect to the independent counsel provisions in

this rule, we use ‘‘independence’’ to refer to the

limits on relationships with third parties that might

affect counsel’s capacity to provide zealous

representation in advising and representing a fund’s

independent directors.

35The amendments we are today adopting do not

require that independent directors retain an

independent counsel, but only that any person who

acts as legal counsel to the independent directors

be an ‘‘independent legal counsel.’’ We requested

comment on whether to require independent

counsel for independent directors. Some

commenters supported a requirement while others

argued that independent directors should decide for

themselves whether they need counsel. We have

determined that not requiring independent counsel

is the appropriate course at this time. We continue

to believe, however, that a likely result of our rule

amendments will be that many fund directors seek

independent counsel. See ABA Task Force Report,

supra note 16, at 3 (‘‘The complexities of the

Investment Company Act, the nature of the separate

responsibilities of independent directors and the

inherent conflicts of interest between a mutual fund

and its managers effectively require that

independent directors seek the advice of counsel in

understanding and discharging their special

responsibilities.’’).

36We believe that independent directors’ access

to independent counsel is also of key importance

when directors address questions of the

appropriateness and legality (under sections 17(a)

and 17(d) of the Act) of proposed transactions

between the fund and its promoter, adviser, or

principal underwriter (or any other affiliated

person). These matters (and those described in the

text above) go to the core of matters addressed by

the Act and the relationship between the fund, its

adviser, and shareholders and may require the

directors to deny fund management’s wishes.

Independent counsel can assist directors in

understanding management proposals, their legal

implications, and the obligations of directors under

the law. When a lawyer for the independent

directors—however learned and well intentioned—

also represents the fund’s adviser, he may be

reluctant to recommend courses of action to the

directors that are opposed by the adviser.

Rule 10e–1 suspends the board

composition requirements for 90 days if

the board can fill a director vacancy, or

150 days if a shareholder vote is

required to fill a vacancy.28 We have

extended the time period when only

board action is required (from the 60

day period we proposed) in response to

comments that additional time would be

needed for independent directors to

select and nominate candidates, and for

the board to elect new directors.29

2. Selection and Nomination of

Independent Directors

We are adopting, as a condition of the

Exemptive Rules, a requirement that the

independent directors of funds relying

on those rules select and nominate 30

any other independent directors.31

Commenters supported the proposal,

and many specifically agreed that the

self-selection and self-nomination of

independent directors fosters an

independent-minded board that focuses

primarily on the interests of a fund’s

investors rather than its adviser.32

Several commenters asked that we

clarify the extent to which fund

shareholders or a fund’s adviser may

participate in the selection and

nomination process under the

amendments. Control of the selection

and nomination process at all times

should rest with a fund’s independent

directors.33 These amendments are not

intended to supplant or limit the ability

of fund shareholders under state law to

nominate independent directors. The

adviser may suggest independent

director candidates if the independent

directors invite such suggestions, and

the adviser may provide administrative

assistance in the selection and

nomination process. Independent

directors, however, should not view

participation by shareholders and

investment advisers in this process as

precluding or excusing the independent

directors from the responsibility to

canvass, recruit, interview, and solicit

independent director candidates.

3. Independent Legal Counsel

We are adopting amendments to each

of the Exemptive Rules to require that

any legal counsel for the fund’s

independent directors be an

‘‘independent legal counsel.’’34 We

believe that the conflicts involved in the

transactions and arrangements

permitted by the Exemptive Rules make

it critical that independent directors,

when they seek legal counsel, be

represented by persons who are free of

significant conflicts of interest that

might affect their legal advice.35

The Commission received many

comments on this proposal. Most fund

management companies, and a number

of independent directors and their

lawyers, opposed the proposed

amendments. Many argued that the

selection of counsel was a matter that

should be left to independent directors.

Some argued that the bar association

rules of professional conduct are

adequate to assure independence of

counsel. Others argued that imposing

the independent counsel requirement

could deny independent directors

competent counsel from larger law firms

with many potential conflicts.

Given the vital role of independent

directors in the resolution of conflicts

between the fund and its investment

adviser, it is important that they have

access to counsel who is free from

conflicting loyalties. This is particularly

true when directors are called upon to

exercise judgment in certain key areas of

their responsibilities such as approving

the advisory contract or a distribution

plan, approving a merger, monitoring

the allocation of fund brokerage, or

valuing fund securities.36 Yet, as we

observed in the Proposing Release, some

independent directors have relied on

3738 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

37See Proposing Release, supra note 3, at n.80

and accompanying text. 38See Letter from Phillip Goldstein, Independent

Director, Clemente Strategic Value Fund, to

Jonathan G. Katz, Secretary, SEC (Feb. 1, 2000), File

No. S7–23–99 (‘‘shareholders of open-end funds

* * * derive no benefit from independent

directors’’); Letter from George W. Karpus,

President, Karpus Investment Management, to

Arthur Levitt, Chairman, SEC (Jan. 21, 2000), File

No. S7–23–99 (independent directors are not really

independent, they are ‘‘house’’ directors

‘‘rubberstamping’’ management decisions); Letter

from Weschler, Harwood, Halebian & Feffer, to

Jonathan G. Katz, Secretary, SEC, (Jan. 14, 2000),

File No. S7–23–99 (‘‘There does not appear to be

any credible evidence to support the view that

independent directors are cost effective from the

standpoint of public investors.’’). See also Samuel

S. Kim, Note, Mutual Funds: Solving the

Shortcomings of the Independent Director Response

to Advisory Self-Dealing Through Use of the Undue

Influence Standard, 98 Colum. L. Rev. 474 (1998).

39When deciding excessive advisory fee cases,

courts have cited directors’ reliance on independent

counsel as a factor evidencing director

independence and conscientiousness. See Schuyt v.

Rowe Price Prime Reserve Fund, Inc., 663 F. Supp.

962, 965, 982, 986 (S.D.N.Y.) (noting that ‘‘[d]uring

all relevant times, the independent

directors*** had their own counsel’’ who was

an ‘‘important resource’’ and whose advice ‘‘the

record indicates the directors made every effort to

keep * * * in mind as they deliberated’’), aff’d,

835 F.2d 45 (2d Cir. 1987); Gartenberg v. Merrill

Lynch Asset Management, Inc., 528 F. Supp. 1038,

1064 (S.D.N.Y. 1981) (noting that the ‘‘noninterested Trustees were represented by their own

independent counsel*** who acted to give

them conscientious and competent advice’’), aff’d,

694 F.2d 923 (2d Cir. 1982).

40As noted above, the amendments as adopted do

not require that independent directors retain legal

counsel, but only that any person who acts as legal

counsel to the independent directors be an

‘‘independent legal counsel.’’ See supra note 35 and

accompanying text. An attorney ‘‘acts as legal

counsel’’ if an attorney-client relationship is

established between counsel and the independent

directors. We do not view a counsel as representing

a fund’s investment adviser merely because the

counsel accepts payment of fees from the adviser

for legal services performed on behalf of the fund

or its independent directors as permitted by

relevant legal ethics rules. See Proposing Release,

supra note 3, at n.87.

41We are adopting as proposed the definition of

‘‘person’’ as any natural person or a company

(including a partnership or other association) as

well as a partner, co-member, or employee of any

person. Rule 0–1(a)(6)(iv)(A) [17 CFR 270.0–

1(a)(6)(iv)(A)]. Thus, the independent directors

should examine any conflicting representations of

their individual attorney, as well as conflicting

representations of that attorney’s law firm, partners,

and employees.

42We are adopting as proposed the definition of

‘‘control person—as any person—other than a

fund—directly or indirectly controlling, controlled

by, or under common control with any of the fund’s

management organizations. Rule 0–1(a)(6)(iv)(B) [17

CFR 270.0–1(a)(6)(iv)(B)].

43We have used the phrase ‘‘sufficiently limited’’

instead of ‘‘so limited,’’ which we used in the

proposal, to provide directors somewhat greater

latitude than the proposal. It is our intent, therefore,

that the scope of the rule be construed by reference

to our discussion in this release and not the

Proposing Release.

44Rule 0–1(a)(6)(i)(A) [17 CFR 270.0–

1(a)(6)(i)(A)]. As we stated in the Proposing Release,

because the interests of a fund, its shareholders, and

its independent directors are nearly always aligned,

the independent legal counsel condition does not

require independent directors to assess a counsel’s

representation of the fund itself. See Proposing

Release, supra note 3, at n.94 and accompanying

text. We do not consider counsel to the fund or to

the fund’s adviser to be legal counsel to the

independent directors by virtue of the independent

directors receiving and relying on advice from such

counsel. However, the independent directors

should be aware that they do not have their own

counsel in those circumstances.

45Rule 0–1(a)(6)(i)(B) [17 CFR 270.0–1(a)(6)(i)(B)].

A lawyer generally has an obligation to inform his

or her client of changes in the nature of conflicts.

See ABA Model Rules, Rule 1.7 (stating that a client

may waive a conflict of interest only after

consultation); see also ABA Comm. on Ethics and

Professional Responsibility, Formal Op. 93–372

(1993) (a client’s generic waiver of future conflicts

would be invalid if the circumstances of a

representation change so that the client’s previous

waiver was not fully informed when given); ABA

Task Force Report, supra note 16 (providing

specific guidance to independent directors of funds

when selecting and using legal counsel, and to

counsel who advise independent directors).

However, a lawyer’s obligations in this regard

envision that the lawyer assess the effect of the

potential conflict first before informing the client,

see ABA Model Rules, Rule 1.7(a)(1), and in any

event may vary among different jurisdictions. The

provision in our final rule concerning counsel’s

undertaking is intended to enable the independent

directors to obtain the information they need in

order to make their own determination about the

independence of their counsel.

46We would not expect that the board meeting

minutes would include detailed information such

as law firm billing records. We would, however,

expect the minutes to include material information

the board considered and relied on in making its

determination.

47Rule 0–1(a)(6)(iii). This provision also would

apply when conflicts arise as a result of a law firm

merger, the hiring of a new partner or associate, the

merger of two financial services firms, or as a result

of a material increase in the scope or nature of the

legal counsel’s representation of a management

organization.

48 Id.

counsel who has simultaneously

represented the fund’s adviser, or who

does substantial legal work for the

adviser or its affiliates.37 We continue to

be concerned by these conflicts and how

they affect the ability of directors to

carry out their responsibilities under the

Act and the Exemptive Rules.

Funds also should be concerned when

counsel to the independent directors

have these types of conflicts of interest.

The appearance of a conflict

undermines the confidence investors

have in the independence of their fund’s

directors to represent investors’

interests. Directors who accept these

conflicts strengthen the argument that

more drastic changes are necessary in

the way mutual funds are governed.38

Fund advisers also should be concerned

when independent directors engage

counsel with substantial conflicts,

because the adviser and the funds may

be denied a significant defense in any

lawsuit charging that its advisory fee or

other payments or transactions are

excessive or inappropriate.39

While we are persuaded that

Commission rulemaking is necessary,

we appreciate the concerns that the

independent directors expressed in their

comment letters on the proposed

amendments. Many were concerned that

the proposal did not afford them

sufficient flexibility in selecting

counsel. Some misunderstood our

proposal as permitting counsel to have

conflicts that are only extremely small

or remote. That was not our intention,

which we have clarified in revising the

proposed amendments.

Under the final rule amendments,

reliance on each of the Exemptive Rules

would be conditioned on any legal

counsel for a fund’s independent

directors being an ‘‘independent legal

counsel.’’ 40 A person 41 is considered an

independent legal counsel if (i) the

independent directors determine that

any representation of the fund’s

investment adviser, principal

underwriter, administrator (collectively

‘‘management organizations’’) or their

control persons 42 during the past two

fiscal years is or was sufficiently

limited 43 that it is unlikely to adversely

affect the professional judgment of the

person in providing legal

representation,44 and (ii) the

independent directors have obtained an

undertaking from the counsel to provide

them information necessary for their

determination, and to update promptly

that information if the counsel begins,

or materially increases, the

representation of a management

organization or control person.45

The final amendments rely on the

independent directors to determine

whether a person is an independent

legal counsel. They must make this

determination no less frequently than

annually, and the basis for the

determination must be recorded in the

board’s meeting minutes.46 If the

independent directors obtain

information that their counsel has begun

to represent a management organization

or control person, they must determine

whether this new representation—

together with any other representations

of management organizations and

control persons—is unlikely to

adversely affect the counsel’s

professional judgment.47 In order to

prevent the fund from losing the

availability of the exemptions in these

circumstances, the rule provides that

counsel can still be considered

‘‘independent legal counsel’’ for up to

three months, which will provide time

for the independent directors to make a

new determination about the counsel or

to hire a new independent legal

counsel.48

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3739

49Rule 0–1(a)(6)(i).

50By adopting these rules, we do not intend to

regulate the legal profession or to suggest that the

existence of a professional relationship between the

independent directors’ counsel and a management

organization would necessarily violate applicable

codes of legal ethics. Moreover, we do not intend

to create a presumption that a lawyer having such

a professional relationship did not provide proper,

objective legal advice, or that the board’s reliance

on its counsel was improper, or that any

determination the board made based on counsel’s

advice was itself improper.

51Whether counsel’s representation of a

management organization (or control person) is

unrelated to a fund is a relevant factor for

independent directors to consider when

determining if the counsel may provide impartial

advice to the independent directors. However, it is

not a conclusive factor. Even if legal services are

unrelated to a fund, those services may be so

substantial, significant, or integral to the business

of the management organization (or control person)

that the independent directors could determine that

the counsel is not an ‘‘independent legal counsel.’’

52We do not intend this list of factors to be an

exhaustive or mandatory list of factors the directors

must consider. See, e.g., ABA Task Force Report,

supra note 16, at 5–9 (providing guidance on factors

that boards may wish to consider when assessing

the quality and independence of their counsel).

53After analyzing the factors, independent

directors may, however, conclude that a counsel’s

representation of a fund’s administrator or subadviser does not impede that counsel’s ability to

serve as an ‘‘independent counsel’’ to the

independent directors. In evaluating whether

representation of an administrator (or its control

person) is ‘‘sufficiently limited’’ for the person to

be an ‘‘independent counsel,’’ we believe a board

could differentiate between an administrator that

merely performs ministerial tasks and one that has

sponsored, organized, or promoted the fund.

Independent directors could reach a similar

conclusion regarding a sub-adviser. The Act does

not distinguish an adviser from a sub-adviser. See

section 2(a)(20) of the Act (15 U.S.C. 80a–2(a)(20)).

However, we believe that independent directors, in

evaluating a counsel’s conflicts, could give

consideration to the nature of a sub-advisory

relationship.

54The ABA Task Force Report acknowledges that

there are circumstances, such as litigation or other

‘‘obvious adversarial situations,’’ in which joint or

multiple representations may never be appropriate.

ABA Task Force Report, supra note 16, at 8. We

agree, but believe that there are additional

circumstances, due to the unique conflicts that are

inherent in the structure of investment companies,

in which independent directors should not accept

joint and multiple representations.

55As discussed below, the compliance date for

the legal counsel provision is July 1, 2002. See infra

Section III.

56See rule 0–1(a)(6)(ii). The independent

directors are entitled to rely on that information

unless they know or have reason to believe that the

information is materially false or incomplete. Id. As

a result, if counsel begins or materially increases

the representation of a fund management

organization but does not inform the independent

directors, the independent directors can rely on the

previous representation they received so that

counsel’s change in representation will not trigger

the requirement that the independent directors

make a new determination within three months.

See rule 0–1(a)(6)(iii).

57Paragraph (d) of rule 17d–1 provides an

exemption from paragraph (a) of the rule, which

prohibits a fund affiliate from participating in any

joint enterprise, joint arrangement, or profit sharing

plan without first obtaining a Commission order.

58See rule 17d–1(d)(7)(iii). The amendments

would prohibit exclusions for (i) bona fide (i.e.,

non-collusive) claims made against any

independent director by another person insured

under the joint insurance policy, and (ii) claims in

which the fund is a co-defendant with an

independent director in a claim brought by a coinsured.

59See section 32(a)(2) of the Act [15 U.S.C. 80a—

31(a)(2)].

60Rule 32a–4(a).

61Rule 32a–4(b).

62Rule 32a–4(c). Commenters suggested that we

permit the audit committee provisions to be set

forth in the charter or bylaws of the fund. The final

rule permits the fund either to adopt an audit

committee charter or to set forth audit committee

provisions in the fund’s charter or bylaws. Rule

32a–4(b).

63See Audit Committee Disclosure, Exchange Act

Release No. 41987 (Oct. 7, 1999) [64 FR 55648 (Oct.

14, 1999)] at text following n.26 (‘‘We recognize

how audit committees function may vary from

Continued

In determining whether a counsel is

an ‘‘independent legal counsel’’ under

the rule, the judgment of the directors

is not unbounded; it must be

reasonable.49 The independent directors

should consider all relevant factors in

evaluating whether the conflicting

representations are ‘‘sufficiently

limited. 50 For example, independent

directors should consider (i) whether

the representation is current and

ongoing; (ii) whether it involves a minor

or substantial matter; (iii) whether it

involves the fund, the adviser, or an

affiliate, and if an affiliate, the nature

and the extent of the affiliation; (iv) the

duration of the conflicting

representation; (v) the importance of the

representation to counsel and his firm

(including the extent to which counsel

relies on that representation

economically); (vi) whether it involves

work related to mutual funds;51 and (vii)

whether the individual who will serve

as legal counsel was or is involved in

the representation.52 Applying these

factors, we do not believe that

independent directors could ordinarily

conclude that a lawyer whose firm

simultaneously represents the fund’s

adviser and independent directors in

connection with matters as important to

fund shareholders as the negotiation of

the advisory contract 53 or distribution

plan, or other key areas of conflict

between the fund and its adviser, is an

‘‘independent legal counsel.’’ 54

We admonish directors to consider

that your decision in selecting an

independent counsel is not merely a

matter of personal preference (as some

commenters suggested), but an

important exercise of your business

judgment as an independent director.55

The final rule makes it clear, however,

that you are entitled to rely on

information provided by counsel in

forming your judgment.56

B. Limits on Coverage of Directors

Under Joint Insurance Policies

We are adopting an amendment to

rule 17d–1(d), which permits funds to

purchase ‘‘errors and omissions’’ joint

insurance policies for their officers and

directors.57 Currently, many of these

policies contain exclusions when

parties sue each other. As a result,

independent directors of funds may not

be covered against lawsuits by the

adviser and consequently may be

reluctant to take actions necessary to

protect fund investors, out of concern

for personal liability. Under the

amendment, which we are adopting as

proposed, rule 17d–1(d) is available

only if the joint insurance policy does

not exclude coverage for litigation

between the adviser and the

independent directors.58 Commenters

supported the proposed amendments,

and agreed that they would allow

independent directors to faithfully carry

out responsibilities without concern for

personal financial security.

C. Independent Audit Committees

We are adopting new rule 32a–4

exempting funds from the Act’s

requirement that shareholders vote on

the selection of the fund’s independent

public accountant if the fund has an

audit committee composed wholly of

independent directors.59 The rule will

permit continuing oversight of the

fund’s accounting and auditing

processes by an independent audit

committee, in place of the shareholder

vote. Commenters agreed that the

shareholder ratification has become

largely perfunctory, and that an

independent audit committee could

exercise more meaningful oversight.

Under the new rule, a fund is exempt

from having to seek shareholder

approval of its independent public

accountant, if (i) the fund establishes an

audit committee composed solely of

independent directors that oversees the

fund’s accounting and auditing

processes,60 (ii) the fund’s board of

directors adopts an audit committee

charter setting forth the committee’s

structure, duties, powers, and methods

of operation, or sets out similar

provisions in the fund’s charter or

bylaws,61 and (iii) the fund maintains a

copy of such an audit committee

charter.62 Some commenters questioned

whether the proposed rule would

require the audit committee to supervise

a fund’s day-to-day management and

operations. The rule does not require,

nor did we intend, that an audit

committee perform daily management

or supervision of a fund’s operations.63

3740 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

company to company, and companies need

flexibility to determine all of the specific duties and

functions of their audit committees.’’).

64Section 2(a)(19) of the Act disqualifies an

individual from being considered an independent

director if he or she knowingly has any direct or

indirect beneficial interest in a security issued by

the fund’s investment adviser or principal

underwriter, or by a controlling person of the

adviser or underwriter. If a fund seeks to replicate

the performance of a securities market index that

includes securities of the fund’s adviser (or

principal underwriter or a controlling person of the

adviser or principal underwriter), an issue could

arise whether the director knowingly has an

indirect beneficial interest in the securities of the

adviser (or principal underwriter or controlling

person). See Proposing Release, supra note 3, at

n.138 and accompanying text.

65The new rule does not address an independent

director’s ownership of securities of an actively

managed fund that owns shares of the fund’s

adviser, underwriter or any of their controlling

persons. As we discussed in the Proposing Release,

we do not believe an independent director who

owns shares of an actively managed fund would

ordinarily ‘‘knowingly’’ have an indirect beneficial

interest in the issuers of securities the fund holds,

and thus ownership of such fund would not cause

a director to be an ‘‘interested person’’ as defined

by section 2(a)(19) of the Act. See Proposing

Release, supra note 3, at n.140.

66As we stated in the context of Form N–1A, a

‘‘broad-based index’’ is an index that ‘‘provides

investors with a performance indicator of the

overall applicable stock or bond markets, as

appropriate. An index would not be considered to

be broad-based if it is composed of securities of

firms in a particular industry or group of related

industries.’’ See Disclosure of Mutual Fund

Performance and Portfolio Managers, Investment

Company Act Release No. 19382 (Apr. 6, 1993) [58

FR 19050 (Apr. 12, 1993)] at n.21.

67Sections 2(a)(19)(A)(v) and (B)(v) of the Act

provide that no person can be an independent

director if he or she is, or is affiliated with, a

registered broker-dealer.

68Section 213(a)(1) of the Gramm-Leach-Bliley

Act incorporates the conditions of current rule

2a19–1(a)(1) under the Act. As amended, section

2(a)(19) now permits an independent director to be

an affiliate of a broker-dealer, but not if the director

or his or her affiliate has executed portfolio

transactions for, engaged in principal transactions

with, or distributed shares for the fund or certain

related funds or accounts within the past six

months. Pub. L. No. 106–102, § 213, 113 Stat. 1338,

1397–98 (1999), to be codified at 15 U.S.C. 80a–

2(a)(19)(A)(v) and (B)(v).

69Under the Administrative Procedure Act [5

U.S.C. 553(b)], notice of proposed rulemaking is not

required if the agency for good cause finds ‘‘that

notice and public procedure thereon are

impracticable, unnecessary, or contrary to the

public interest.’’ Section 213 of the Gramm-LeachBliley Act established new standards for

determining independence under the circumstances

addressed by rule 2a19–1, and the rule is no longer

necessary. The Commission therefore finds that

proposing the rescission of rule 2a19–1 for public

comment is unnecessary.

70 Item 22(b)(1) of Schedule 14A; Items 13(a) and

22(b)(5) of Form N–1A; Item 18.1 and Instruction

4.e. to Item 23 of Form N–2; Item 20(a) and

Instruction 4(v) to Item 27 of Form N–3. For

convenience in discussing the requirements, we are

not specifically referring to nominees for election as

directors. The requirements, however, are

applicable to nominees in proxy statements for the

election of directors. The disclosure requirements

in Item 22 of Schedule 14A also are applicable to

information statements prepared in accordance

with Regulation 14C and Schedule 14C [17 CFR

240.14c–101].

71 In response to privacy concerns raised by

several commenters, we wish to clarify that a

director may provide the address of the fund or the

fund’s adviser in the table and need not provide his

personal address.

D. Qualification as an Independent

Director

In addition to the amendments to

enhance the independence of fund

boards, we are adopting a new rule to

prevent qualified individuals from being

unnecessarily disqualified from being

considered an independent director. We

are also rescinding a rule that has

become unnecessary.

1. Ownership of Index Fund Securities

We are adopting new rule 2a19–3,

which conditionally exempts an

individual from being disqualified as an

independent director solely because he

or she owns shares of an index fund that

invests in the investment adviser or

underwriter of the fund, or their

controlling persons.64 As proposed, the

exemption would have been available if

the value of securities issued by the

adviser or underwriter (or controlling

person) did not exceed five percent of

the value of any index tracked by the

index fund. The purpose of this

condition was to assure that an

independent director’s indirect interest

in the adviser’s securities would not be

substantial enough to impair his or her

independence and create a conflict of

interest.65 In response to some

commenters’ concerns that monitoring

the five percent limit would be very

difficult, we revised the rule so that it

provides relief if a fund’s investment

objective is to replicate the performance

of one or more ‘‘broad-based’’ indices.66

2. Affiliation with a Broker-Dealer

We are rescinding rule 2a19–1, which

provides relief from the section of the

Act that defines when a fund director is

considered to be independent.67 We had

proposed to amend that rule to permit

a slightly greater percentage of fund

independent directors to be affiliated

with registered broker-dealers, under

certain circumstances. After our

proposal, however, Congress passed the

Gramm-Leach-Bliley Act, which

amended section 2(a)(19) of the

Investment Company Act and

established new standards for

determining independence under the

circumstances we addressed in our

proposal.68 These amendments to the

Act obviate the need for the exemptive

relief provided by rule 2a19–1, and

therefore we are rescinding the rule.69

E. Disclosure of Information about Fund

Directors

We believe that shareholders have a

significant interest in knowing who the

independent directors are, whether the

independent directors’ interests are

aligned with shareholders’ interests,

whether the independent directors have

any conflicts of interest, and how the

directors govern the fund. This

information helps a mutual fund

shareholder to evaluate whether the

independent directors can, in fact, act as

an independent, vigorous, and effective

force in overseeing fund operations.

In reevaluating our current disclosure

requirements, we concluded that, while

our fundamental approach has been

sound, there are several gaps in the

information that shareholders currently

receive about directors. We therefore

proposed amendments to close these

gaps. The proposal would require funds

to:

• Provide basic information about

directors to shareholders annually so

that shareholders will know the identity

and experience of their representatives;

• Disclose to shareholders fund

shares owned by directors to help

shareholders evaluate whether directors’

interests are aligned with their own;

• Disclose to shareholders

information about directors that may

raise conflict of interest concerns; and

• Provide information to shareholders

on the board’s role in governing the

fund.

We are adopting the disclosure

amendments with several modifications

designed to tailor the amendments more

closely to our goal of providing

shareholders with better information to

evaluate the independent directors.

1. Basic Information

We are adopting the requirement to

disclose basic information about

directors in an easy-to-read tabular

format, as proposed.70 The table will be

required in three places: the fund’s

annual report to shareholders, SAI, and

proxy statement for the election of

directors. The table will require for each

director: (1) Name, address, and age; (2)

current positions held with the fund; (3)

term of office and length of time served;

(4) principal occupations during the

past five years; (5) number of portfolios

overseen within the fund complex; and

(6) other directorships held outside of

the fund complex.71 The table also

requires for each interested director, as

defined in Section 2(a)(19) of the

Investment Company Act, a description

of the relationship, events, or

transactions by reason of which the

director is an interested person.

Commenters generally supported the

proposal, although several commenters

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3741

72 Instruction 4 to Item 22(b)(1) of Schedule 14A;

Instruction 2 to Item 13(a) of Form N–1A;

Instruction 2 to Item 18.1 of Form N–2; Instruction

2 to Item 20(a) of Form N–3.

73As discussed below, however, we are excluding

interested directors from the new conflicts of

interest disclosure requirements which we

proposed in order to give shareholders better

information about independent directors. See infra

note 84 and accompanying text.

74 Item 22(b)(5) of Schedule 14A; Item 13(b)(4) of

Form N–1A; Item 18.7 of Form N–2; Item 20(f) of

Form N–3.

75 17 CFR 240.13d—3.

76 17 CFR 240.16a–1(a)(2). We also have modified

the proposal requiring disclosure of securities

owned by an independent director and his

immediate family members in an investment

adviser or principal underwriter and persons

controlling, controlled by, or under common

control with an investment adviser or principal

underwriter. This requirement is intended to

illuminate potential conflicts of interest, and we

therefore believe that any record or beneficial

securities ownership in these entities should be

disclosed, whether the beneficial ownership results

from voting power, investment power, or economic

interests. Therefore, we have revised the proposal

to require disclosure of securities owned if covered

by the definition of ‘‘beneficial ownership’’

contained in either rule 13d–3 or rule 16a–1(a)(2).

Item 22(b)(6) and Instruction 2 to Item 22(b)(6) of

Schedule 14A; Item 13(b)(5) and Instruction 2 to

Item 13(b)(5) of Form N–1A; Item 18.8 and

Instruction 2 of Item 18.8 of Form N–2; Item 20(g)

and Instruction 2 of Item 20(g) of Form N–3.

opposed as unnecessary the requirement

to describe in the table the

relationships, events, or transactions

that make certain directors ‘‘interested

persons.’’ Funds are currently required

to disclose this information in the proxy

statement for the election of directors,

and we are adopting this requirement as

proposed.72 We believe it is important

that shareholders be provided with an

explanation of why certain directors are

‘‘interested persons.’’73

2. Ownership of Equity Securities in

Fund Complex

We are adopting with modifications

the requirement to disclose the amount

of equity securities of funds in a fund

complex owned by each director.74

Commenters generally agreed with the

Commission that disclosure of this

information would be useful to

shareholders in assessing whether

directors’ interests are aligned with

those of shareholders.

(a) Disclosure of Amounts Owned by

Directors

Many commenters expressed concern

about the proposed requirement that

funds disclose the exact dollar amount

of securities directors own in a fund

complex. These commenters argued that

this disclosure would discourage

potential directors from agreeing to

serve, in order to avoid intrusions into

their privacy, and might cause existing

directors to reduce or sell their holdings

to avoid publicity about their

investments. As an alternative, many

suggested that we require funds to

disclose directors’ equity ownership

using specified dollar ranges, rather

than exact dollar amounts. These

commenters noted that using dollar

ranges would provide shareholders with

sufficient information to assess whether

directors’ interests were aligned with

their own, making disclosure of exact

dollar amounts unnecessary.

We are persuaded by these comments

and have modified the proposal to

require disclosure of a director’s

holdings of securities using dollar

ranges rather than an exact dollar

amount. Funds will be required to

disclose directors’ equity ownership

using the following ranges: None; $1–

$10,000; $10,001–$50,000; $50,001–

$100,000; or over $100,000. We believe

that disclosure of directors’ holdings

using these dollar ranges will provide

investors with significant information to

use in evaluating whether directors’

interests are aligned with their own,

while protecting directors’ legitimate

privacy interests.

(b) ‘‘Beneficial Ownership’’

We received a number of comments

requesting clarification about the types

of director holdings that would be

disclosed under the proposal. Based on

these comments, we reevaluated our

proposal to require disclosure of

securities owned beneficially and of

record by each director. Under the

proposal, ‘‘beneficial ownership’’ would

have been determined in accordance

with rule 13d–3 of the Exchange Act,

which focuses on a person’s voting and

investment power.75 In light of our

objective of providing information about

the alignment of directors’ and

shareholders’ interests, we believe that

disclosure of record holdings should not

be required and that the focus of

‘‘beneficial ownership’’ should be on

whether a director’s economic interests

are tied to the securities, rather than his

ability to exert voting power or to

dispose of the securities. Therefore, we

are modifying the proposal to require

disclosure of ‘‘beneficial ownership’’ in

accordance with the definition

contained in rule 16a–1(a)(2) under the

Exchange Act.76 This definition,

consistent with our goal, emphasizes the

economic incidence of ownership.

(c) Disclosure of Ownership in the

Funds the Director Oversees within the

Same ‘‘Family of Investment

Companies’’

We proposed to require aggregate

disclosure of a director’s holdings in a

fund complex, rather than separate

disclosure of a director’s holdings in a

particular fund. We were concerned that

fund-specific information might have

limited meaning because of the many

reasons that a director could have for

not holding shares of any specific fund,

e.g., that its investment objective did not

fill a need in the director’s portfolio.

Several commenters recommended,

however, that disclosure of a director’s

holdings should be made on a fund-byfund basis, rather than a complex-wide

basis, arguing that it would be more

relevant to disclose to shareholders a

director’s ownership of the specific

funds on whose board the director

serves. Other commenters, agreed that

disclosure of a director’s holdings

should be on an aggregate basis as

proposed, but recommended that the

disclosure be limited to a director’s

aggregate ownership in the funds

overseen by a director within a fund

complex. These commenters argued that

disclosure in this manner is more useful

to investors than complex-wide

disclosure in assessing whether a

director’s interests are aligned with their

own.

We are persuaded by these comments

and have modified the proposal to

require disclosure of: (1) Each director’s

ownership in each fund that he

oversees; and (2) each director’s

aggregate ownership in any funds that

he oversees within a fund family. We

believe that a director’s ownership in a

particular fund provides the most direct

indication of his alignment with the

interests of shareholders in that fund.

We continue to believe, however, that

disclosure of a director’s aggregate

ownership will provide shareholders

with relevant information about the

director’s alignment with shareholders.

In addition, a director could have many

reasons for not holding shares of a

specific fund, e.g., that its investment

objectives do not match the director’s.

Disclosure of aggregate ownership will

help prevent any inappropriate negative

inference about fund management that a

fund shareholder could draw from the

fact that a director does not hold shares

of a particular fund.

For purposes of determining a

director’s holdings in a fund complex,

the Commission proposed to define

‘‘fund complex’’ as two or more funds

that (1) hold themselves out to investors

as related companies for purposes of

investment and investor services; or (2)

have a common investment adviser or

an investment adviser that is an

affiliated person of the investment

3742 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

77Cf. redesignated Item 22(a)(1)(vi) of Schedule

14A (definition of fund complex).

78Cf. Item H of Form N–SAR [17 CFR 274.101]

(definition of ‘‘family of investment companies’’).

79 Item 22(a)(1)(iv) of Schedule 14A; Instruction

1(a) to Item 13 of Form N–1A; Instruction 1.a to

Item 18 of Form N–2; Instruction 1.a to Item 20 of

Form N–3.

80 Instruction 1 to Item 22(b)(5) of Schedule 14A.

81 Instruction 1 to Item 13(b)(4) of Form N–1A;

Instruction 1 to Item 18.7 of Form N–2; Instruction

1 to Item 20(f) of Form N–3.

82 Items 22(b)(4), 22(b)(6), 22(b)(7), 22(b)(8),

22(b)(9), and 22(b)(10) of Schedule 14A; Items

13(b)(3), 13(b)(5), 13(b)(6), 13(b)(7), 13(b)(8), and

13(b)(9) of Form N–1A; Items 18.6, 18.8, 18.9, 18.10,

18.11, and 18.12 of Form N–2; Items 20(e), 20(g),

20(h), 20(i), 20(j), and 20(k) of Form N–3.

83See Proposing Release, supra note 3, at n.149

and accompanying text.

84 Items 22(b)(4), 22(b)(6), 22(b)(7), 22(b)(8),

22(b)(9), and 22(b)(10) of Schedule 14A; Items

13(b)(3), 13(b)(5), 13(b)(6), 13(b)(7), 13(b)(8), and

13(b)(9) of Form N–1A; Items 18.6, 18.8, 18.9, 18.10,

18.11, and 18.12 of Form N–2; Items 20(e), 20(g),

20(h), 20(i), 20(j), and 20(k) of Form N–3.

85See supra 73 note and accompanying text. In

addition, we are retaining the existing requirement

that funds disclose positions held by interested

directors with affiliated persons or principal

underwriters of the fund. Item 22(b)(2) of Schedule

14A; Item 13(a)(2) of Form N–1A; Item 18.2 of Form

N–2; Item 20(b) of Form N–3.

86 Item 22(a)(1)(vii) of Schedule 14A; Instruction

1(c) to Item 13 of Form N–1A; Instruction 1.c to

Item 18 of Form N–2; Instruction 1.c to Item 20 of

Form N–3. The term ‘‘children’’ includes step and

adoptive children. We are using the term

‘‘dependent’’ as defined in section 152 of the

Internal Revenue Code. I.R.C. 152.

87Proposed Item 22(a)(vi) of Schedule 14A;

Proposed Instruction 1(b) to Item 13 of Form N–1A;

Proposed Instruction 1.b. to Item 18 of Form N–2;

Proposed Instruction 1.b. to Item 20 of Form N–3.

adviser of any of the other funds.77

Many commenters argued that this

definition would result in disclosure of

holdings in funds that are too remotely

related to funds on whose board the

director serves to demonstrate

alignment with fund shareholders (e.g.,

for a director serving on the board of a

fund with a sub-adviser, the director’s

ownership in any other funds that the

sub-adviser serves would be disclosed,

regardless of whether the funds are

otherwise related). These commenters

recommended that the Commission

adopt a narrower definition of ‘‘family

of investment companies,’’ which

includes only funds that share the same

investment adviser or principal

underwriter and hold themselves out to

investors as related companies for

purposes of investment and investor

services.78 We agree with commenters

that the proposed ‘‘fund complex’’

definition could result in disclosure of

information having little bearing on a

director’s alignment with shareholders,

and are adopting the narrower

definition of ‘‘family of investment

companies.’’ 79

(d) Date of Disclosure

The equity ownership information

must be included in the SAI and any

proxy statement relating to the election

of directors. For the proxy statement,

the equity ownership information must

be provided as of the most recent

practicable date, as proposed, in order

to ensure that shareholders receive upto-date information when they are asked

to vote to elect directors.80 For the SAI,

we have modified the proposal to

require that the equity ownership

information be provided as of the end of

the last completed calendar year.81 We

believe that this modified time period

requirement facilitates our goal that

investors receive equity ownership

information to evaluate whether

directors’ interests are aligned with their

own, while imposing less of a burden on

directors, especially those who serve

multiple funds with staggered fiscal

years.

3. Conflicts of Interest

We are adopting our proposals on

conflicts of interest disclosure, with

modifications that tailor the

requirements more closely to our goals

and address commenters’ concerns that

some aspects of the proposal were

overbroad.82 We proposed to require

funds to disclose in the proxy statement

and SAI three types of circumstances

that could affect the allegiance of fund

directors to their shareholders:

positions, interests, and transactions

and relationships of directors and their

immediate family members with the

fund and persons related to the fund.

The rules we adopt today follow this

basic approach.

A number of commenters

recommended alternatives to the

proposed conflicts of interest disclosure

requirements, including: (i) Requiring

funds to maintain records of potential

conflicts of interest of directors; (ii)

permitting independent directors to

determine for themselves whether or not

conflicts of interest exist that affect the

‘‘independence’’ of other independent

directors; and (iii) limiting conflicts of

interest disclosure to the proxy

statement for the election of directors.

After careful consideration of these

alternatives, we have determined that

they would not constitute an adequate

substitute for disclosure to shareholders.

We continue to believe that

shareholders have a significant interest

in information concerning

circumstances that may affect the

directors’ allegiance to shareholders.

None of the alternatives suggested by

commenters would provide this

information to shareholders on a regular

basis. The first two alternatives would

completely exclude shareholders from

the process of evaluating the

independence of directors. The third

alternative, limiting conflicts of interest

disclosure to the proxy statement for the

election of directors, ignores the fact

that the proxy statement has become an

ineffective vehicle for communicating

information to fund shareholders on a

regular basis because funds generally

are no longer required to hold annual

meetings.83

(a) Modifications to Persons Covered

(1) Interested Directors

We are modifying our proposal to

exclude interested directors from the

conflicts of interest disclosure

requirements in both the SAI and proxy

statement.84 We are persuaded by the

commenters’ arguments that if the

purpose of the conflicts of interest

disclosure is to allow investors and the

Commission staff to better evaluate the

true independence of independent

directors, this goal will not be achieved

by requiring disclosure of interested

directors’ potential conflicts of interest.

As previously discussed, however,

funds will be required to describe the

relationships, events, or transactions

that make a director an interested

person.85

(2) Immediate Family Members

We are narrowing the scope of

‘‘immediate family members’’ covered

by the disclosure requirements to a

director’s spouse, children residing in

the director’s household, and

dependents of the director.86 As

proposed, ‘‘immediate family members’’

also included the director’s parents,

siblings, children not residing with the

director, and in-laws.87

We received many comments on this

definition, with the overwhelming

majority of commenters arguing that the

proposed extension of conflicts of

interest disclosure to include a

director’s immediate family members, as

defined in the proposal, was overly

broad and too burdensome. Commenters

noted that the definition, as proposed,

would require directors to seek financial

information from remote family

members with whom they have little or

no contact, and that the requirement

could impose liabilities on directors

without providing the means to enable

directors to obtain the required

information from reluctant relatives. We

are persuaded by the commenters and

have addressed their concerns by

limiting the definition of ‘‘immediate

family members’’ along the lines

suggested by many commenters. The

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3743

88A number of commenters recommended that if

the Commission adopted the proposed definition of

‘‘immediate family members,’’ disclosure of

potential conflicts of interest should be limited to

those of which the director had actual knowledge.

Since we are narrowing the definition of

‘‘immediate family member,’’ incorporation of an

actual knowledge standard is unnecessary.

89 Items 22(b)(4)(iv), 22(b)(6)(ii), 22(b)(7)(ii),

22(b)(8)(vii), 22(b)(9), and 22(b)(10)(iii) of Schedule

14A; Items 13(b)(3)(iv), 13(b)(5)(ii), 13(b)(6)(ii),

13(b)(7)(vii), 13(b)(8), and 13(b)(9)(iii) of Form N–

1A; Items 18.6(d), 18.8(b), 18.9(b), 18.10(g), 18.11,

and 18.12(c) of Form N–2; Items 20(e)(iv), 20(g)(ii),

20(h)(ii), 20(i)(vii), 20(j), and 20(k)(iii) of Form N–

3.

90See Item 22(b)(1) of Schedule 14A (requiring

independent directors to disclose direct or indirect

securities interests in any person under common

control with fund’s adviser); Item 22(b)(3)

(requiring all directors to disclose material

transactions to which the adviser, principal

underwriter, administrator, any parent or subsidiary

of such entities (other than another fund), or any

subsidiary of the parent of such entities was or is

to be a party).

91 Items 22(b)(7), 22(b)(8), and 22(b)(9) of

Schedule 14A; Items 13(b)(6), 13(b)(7), and 13(b)(8)

of Form N–1A; Items 18.9, 18.10, and 18.11 of Form

N–2; Items 20(h), 20(i), and 20(j) of Form N–3. In

the case of transactions, the $60,000 threshold

applies to the size of a transaction, and a materiality

standard applies to the director’s or immediate

family member’s interest in the transaction. Item

22(b)(8) of Schedule 14A; Item 13(b)(7) of Form N–

1A; Item 18.10 of Form N–2; Item 20(i) of Form N–

3. The materiality of the interest is to be determined

based on the significance of the information to

investors in light of all the circumstances.

Instruction 8 to Item 22(b)(8) of Schedule 14A;

Instruction 7 to Item 13(b)(7) of Form N–1A;

Instruction 7 to Item 18.10 of Form N–2; Instruction

7 to Item 20(i) of Form N–3. This is similar to a

provision of the current proxy rules. Item 404(a) of

Regulation S–K.

92Cf. redesignated Item 22(b)(11) of Schedule

14A; Item 404(a) of Regulation S–K. In determining

whether the $60,000 threshold is exceeded for

interests and relationships, a director’s interest is to

be aggregated with those of his immediate family

members. Instruction 2 to Item 22(b)(7) and

Instruction 6 to Item 22(b)(9) of Schedule 14A;

Instruction 2 to Item 13(b)(6) and Instruction 5 to

Item 13(b)(8) of Form N–1A; Instruction 2 to Item

18.9 and Instruction 5 to Item 18.11 of Form N–2;

Instruction 2 to Item 20(h) and Instruction 5 to Item

20(j) of Form N–3.

93 Items 22(b)(4) and 22(b)(7) of Schedule 14A.

94 Items 13(b)(3) and 13(b)(6) of Form N–1A;

Items 18.6 and 18.9 of Form N–2; Items 20(e) and

20(h) of Form N–3.

95Several commenters recommended that the

Commission limit all conflicts of interest disclosure

to a two-year period. These commenters argued that

a two-year time period is consistent with the time

limit for material business or professional

relationships in section 2(a)(19) of the Act. We note,

however, that the five-year time period for

disclosure of positions and interests is currently

required in the proxy rules. In fact, when the

amendments to the proxy rules were adopted in

1994, most of the commenters that addressed the

issue of time periods recommended limiting the

disclosure of past relationships to the preceding

five-year period. See Investment Company Act Rel.

No. 20614 (Oct. 13, 1994) [59 FR 52689 (October 19,

1994)].

96 Items 22(b)(8) and 22(b)(9) of Schedule 14A.

narrower definition ensures that

disclosure will only be required with

respect to family members from whom

directors can reasonably be expected to

obtain the required information.88

(3) Related Persons

The Commission proposed to require

disclosure about circumstances

involving directors, on the one hand,

and the fund and persons related to the

fund, on the other. We are modifying

the proposal to exclude administrators

from the persons related to the fund that

are covered by the requirements. Several

commenters expressed concern that

inclusion of administrators that are not

affiliated with the fund’s adviser or

principal underwriter would produce

irrelevant and unnecessary information

for shareholders because interactions

between directors and unaffiliated

administrators would not create

conflicts of interest that could affect an

independent director’s judgment. We

are persuaded by these commenters and

note that administrators that control, are

controlled by, or are under common

control with the adviser or principal

underwriter will be covered by the

conflicts of interest disclosure.89

While some commenters also

recommended excluding entities ‘‘under

common control’’ with the adviser or

principal underwriter, we believe that

disclosure of interests, positions, and

transactions and relationships with

entities under common control is

important and could highlight

circumstances that potentially could

affect the judgment of independent

directors. We also note that the current

proxy rules require disclosure with

respect to commonly controlled

entities.90

Although we are narrowing the scope

of immediate family members and

related persons in recognition of the

overbreadth of our proposal in certain

circumstances, we wish to emphasize

that a fund’s independent directors can

vigilantly represent the interests of

shareholders only when they are truly

independent of those who operate and

manage the fund. To that end, we

encourage funds to examine any

circumstances that could potentially

impair the independence of

independent directors, whether or not

they fall within the scope of our

disclosure requirements. There may, for

example, be circumstances where an

interest of a family member outside the

ambit of our rules, or a director’s

interest in an administrator, impairs the

director’s ability to represent the

interests of shareholders vigilantly.

(b) Other Modifications

(1) Threshold for Disclosure of Interests,

Transactions, and Relationships

We are adopting a $60,000 threshold

for disclosure of interests, transactions,

and relationships.91 Many commenters

requested that the Commission establish

a specific dollar threshold that would

trigger the disclosure requirements to

eliminate the need to make subjective

‘‘materiality’’ determinations. We are

persuaded by these comments and are

adopting the $60,000 threshold, a level

recommended by many commenters and

contained in the existing proxy rules.92

We have replaced a materiality test

with the $60,000 threshold in order to

facilitate compliance with the

disclosure requirements that we adopt

today. This change does not, however,

reflect a determination that the $60,000

threshold may be equated with

‘‘materiality.’’ We note that the

antifraud provisions of the federal

securities laws may obligate funds to

disclose a material conflict of interest

between a director and the fund or its

shareholders without regard to the

$60,000 threshold. For example, a

transaction between a director and a

fund’s adviser may constitute a material

conflict of interest with the fund or its

shareholders that is required to be

disclosed, regardless of the amount

involved, if the terms and conditions of

the transaction are not comparable to

those that would have been negotiated

at ‘‘arms-length’’ in similar

circumstances.

(2) Time Periods

We are adopting, as proposed, a fiveyear time period for disclosure of

positions and interests of directors and

immediate family members in the proxy

statement for the election of directors.93

We are, however, reducing the time

period for disclosure of positions and

interests in the SAI to two calendar

years.94 We believe that, when a

shareholder is asked to vote to elect

directors, he is entitled to information

about potential conflicts covering a

significant period of time.95 We

recognize, however, that providing five

years of information annually in the

SAI, would, as suggested by

commenters, increase fund compliance

burdens without commensurate benefits

to shareholders.

We are adopting, as proposed, the

requirement to disclose material

transactions and relationships since the

beginning of the last two completed

fiscal years in the proxy statement for

the election of directors.96 In the SAI,

however, we have modified the

proposal to require disclosure of

transactions and relationships during

the two most recently completed

calendar years, rather than the last two

3744 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

97 Items 13(b)(7) and 13(b)(8) of Form N–1A;

Items 18.10 and 18.11 of Form N–2; Items 20(i) and

20(j) of Form N–3. 98We also have modified the proposal to require

funds to disclose in the SAI cross-directorships

held by independent directors and their immediate

family members during the last two most recently

completed calendar years, rather than the last two

fiscal years as proposed. Item 13(b)(9) of Form N–

1A; Item 18.12 of Form N–2; Item 20(k) of Form N–

3. 99 Instruction 11 to Item 22(b)(8) and Instruction

9 to Item 22(b)(9) of Schedule 14A; Instruction 10

to Item 13(b)(7) and Instruction 8 to Item 13(b)(8)

of Form N–1A; Instruction 10 to Item 18.10 and

Instruction 8 to Item 18.11 of Form N–2; Instruction

10 to Item 20(i) and Instruction 8 to Item 20(j) of

Form N–3. We also note that sales load waivers

granted to fund directors generally would not be

required to be disclosed as ‘‘material’’ transactions

or relationships, provided that such waivers are

disclosed as otherwise required. See Instruction 3

to Item 18(c) of Form N–1A; Instruction 3 to Item

5.2 of Form N–2; Instruction to Item 23(b) of Form

N–3 (requiring funds to provide explanations for

any differences in the price at which securities are

offered generally to the public and the prices at

which securities are offered to any class of

individuals).

100 Items 7(e) and 22(b)(14) of Schedule 14A; Item

13(b)(2) of Form N–1A; Item 18.5 of Form N–2; Item

20(d) of Form N–3.

101 Item 13(b)(10) of Form N–1A; Item 18.13 of

Form N–2; Item 20(l) of Form N–3.

102United States General Accounting Office,

Mutual Fund Fees: Additional Disclosure Could

Encourage Price Competition (June 2000) at 97.

103 Instruction 3 to Item 22(b) of Schedule 14A;

Instruction 2 to Item 13 of Form N–1A; Instruction

2 to Item 18 of Form N–2; Instruction 2 to Item 20

of Form N–3.

104We reiterate that funds may present

information regarding independent and interested

directors in a single table or chart, so long as the

information for independent and interested

directors is provided in separate sections within the

table or chart. See Proposing Release, supra note,

at text accompanying and following n.226.

105See rule 31a–2(a)(4), (5).

106For a discussion of the Commission staff’s

views on the types of professional and business

relationships that may be considered material for

purposes of sections 2(a)(19)(A)(vi) and (B)(vi) of

the Act, see Interpretive Matters Concerning

Independent Directors of Investment Companies,

Investment Company Act Release No. 24083 (Oct.

14, 1999) [64 FR 59877 (Nov. 3, 1999)].

fiscal years as proposed.97 Many

commenters noted that a director may

serve multiple funds with staggered

fiscal years and that a requirement to

disclose transactions and relationships

for fiscal year time periods could

require funds to obtain the information

from directors as frequently as monthly,

which would be overly burdensome. We

have revised the proposal to require two

calendar years of disclosure, rather than

two fiscal years, in order to reduce this

burden for funds with staggered fiscal

years, while maintaining the

requirement to include two years of

disclosure.98

(3) Routine, Retail Transactions and

Relationships

As proposed, the conflicts of interest

disclosure provisions would not have

required a fund to disclose routine,

retail transactions and relationships,

such as a credit card or bank or

brokerage account, unless the director is

accorded special treatment. At the

request of commenters, we are clarifying

that the exception for routine, retail

transactions and relationships extends

to residential mortgages and insurance

policies.99 We also note that the

exception for routine, retail transactions

and relationships is not limited to the

specific transactions and relationships

enumerated (credit cards, bank or

brokerage accounts, residential

mortgages, and insurance policies), but

extends to other routine, retail

transactions and relationships where the

director is not accorded special

treatment.

4. Board’s Role in Fund Governance

We are adopting, as proposed,

disclosure requirements in the proxy

rules and the SAI relating to a fund’s

committees of the board of directors,

which commenters generally

supported.100 We are also adopting, as

proposed, the requirement to disclose in

the SAI the board’s basis for approving

an existing investment advisory

contract.101

A number of commenters argued that

information about the board’s basis for

approving an existing advisory contract

is not relevant to an investment decision

and disclosure of this information will

be ‘‘boilerplate’’ in nature. After careful

consideration of these comments, we

continue to believe that shareholders

should receive information in the SAI to

help them evaluate the board’s basis for

approving the renewal of an existing

investment advisory contract. In

approving an investment advisory

contract, independent directors must

review the level of fees charged. Mutual

funds fees and expenses, including

advisory fees, are extremely important

to shareholders. We note that the United

States General Accounting Office

(‘‘GAO’’), in a recent report to Congress

on mutual fund fees, stressed the

importance of heightening ‘‘investors’’

awareness and understanding of the fees

they pay.102 We believe that the rules

we adopt today, which will ensure that

shareholders receive specific

information on how directors evaluate

and approve fees on a regular basis, will

help to address the GAO’s concerns. In

implementing this disclosure

requirement, we remind funds that

‘‘boilerplate’’ disclosure is not

appropriate. Funds are required to

provide appropriate detail regarding the

board’s basis for approving an existing

investment advisory contract, including

the particular factors forming the basis

of this determination.

5. Separate Disclosure

We are adopting, as proposed, the

requirement that funds present all

disclosure for independent directors

separately from disclosure for interested

directors in the SAI, proxy statements

for the election of directors, and annual

reports to shareholders.103 While several

commenters argued that this

requirement would confuse

shareholders by overemphasizing the

differences between independent and

interested directors, we believe that the

new disclosure format will assist

shareholders in understanding

information about directors, particularly

in evaluating whether the independent

directors can, in fact, act as an

independent, vigorous, and effective

force in overseeing fund operations.104

6. Technical and Conforming

Amendments

The Commission is adopting, as

proposed, the technical and conforming

amendments to its schedules, forms,

and rules.

F. Recordkeeping Regarding Director

Independence

We are adopting as proposed the

amendments to rule 31a–2, to require

funds to preserve for a period of at least

six years any record of: (i) The initial

determination that a director qualifies as

an independent director, (ii) each

subsequent determination of whether

the director continues to qualify as an

independent director, and (iii) the

determination that any person who is

acting as legal counsel to the

independent directors is an

independent legal counsel.105 The rule

amendments, which commenters

supported, are designed to permit the

Commission staff to monitor a fund’s

assessment of the independence of

directors, and to ascertain whether a

fund’s assessment reflects diligent

efforts to evaluate relevant business and

personal relationships that might affect

each director’s independent

judgment.106

III. Effective Date; Compliance Dates

A. Effective Date

The new rules and amendments to

rules and forms that the Commission is

adopting today will become effective

February 15, 2001. The rescission of

rule 2a19–1 will become effective on

May 12, 2001, the effective date of

section 213 of the Gramm-Leach-Bliley

Act.

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3745

107See rule 17d–1(d)(7)(iii).

108 17 CFR 230.485.

109 17 CFR 230.485(b). This also would apply to

closed-end interval funds filing post-effective

amendments pursuant to rule 486(b) under the

Securities Act. 17 CFR 230.486(b).

110 17 CFR 230.485(a) and 230.485(b). Likewise,

closed-end interval funds filing future post-effective

amendments must determine whether they must

file pursuant to rule 486(a) or may file pursuant to

rule 486(b) of the Securities Act. 17 CFR 230.486(a)

and 230.486(b).

111See Proposing Release, supra note , at text

following n.33.

112One commenter stated that the Commission’s

proposed amendments and rules will increase the

costs of relying on the Exemptive Rules, and that

the ‘‘financial impact of the [Commission’s]

Proposal is underestimated.’’ The commenter did

not provide specific dollar figures to quantify what

it believed were more accurate reflections of the

possible costs of the Amendments. Moreover,

whether a particular fund incurs additional costs,

and the amount of those costs, will depend upon

a number of factors specific to the fund.

113See Proposing Release, supra note , at n.39

and accompanying text.

114Under some circumstances a vacancy on the

board may be filled by the board of directors. See

section 16(a) of the Act. In those cases, the fund

would not incur the costs of the proxy statement

and shareholder meeting.

115See Proposing Release, supra note 3, at n.66

and accompanying text.

B. Compliance Dates for Investment

Company Act Rule Amendments

1. February 15, 2001. Persons may

begin to rely upon new rules 2a19–3,

10e–1 and 32a–4 on February 15, 2001,

the effective date of these rules.

2. July 1, 2002. After July 1, 2002: (i)

persons may rely upon any of the

Exemptive Rules (rules 10f–3, 12b–1,

15a–4(b)(2), 17a–7, 17a–8, 17d–1(d)(7),

17e–1, 17g–1(j), 18f–3, and 23c–3) only

if they comply with each of the three

new conditions for use of each rule; (ii)

persons may rely upon rule 17d–1(d)(7)

only if any joint insurance policy then

in effect does not exclude coverage of

litigation between the independent

directors and another insured person

under the amended rule;107 and (iii)

funds must begin to comply with the

recordkeeping requirements of amended

rule 31a–2.

C. Compliance Date for Disclosure

Amendments

January 31, 2002. All new registration

statements and post-effective

amendments that are annual updates to

effective registration statements, proxy

statements for the election of directors,

and reports to shareholders filed on or

after January 31, 2002 must comply with

the disclosure amendments. Based on

the comments, we believe that this will

provide funds with sufficient time to

make the necessary changes to

disclosure documents. We note that a

post-effective amendment that is filed

for any purpose other than those

specifically enumerated in paragraph

(b)(1) of rule 485 is required to be filed

pursuant to rule 485(a).108 We would

not, however, object if existing funds

file their first annual update complying

with the amendments pursuant to rule

485(b), unless information is included

in response to the new conflicts of

interest disclosure requirements,

provided that the post-effective

amendment otherwise meets the

conditions for immediate effectiveness

under the rule.109 Thereafter, funds

must make their own determination as

to whether their annual updates should

be filed pursuant to rule 485(a) or may

be filed pursuant to rule 485(b) under

the Securities Act.110

III. Cost-Benefit Analysis

The Commission is sensitive to the

costs and benefits imposed by its rules.

In the Proposing Release, we requested

comments and specific data regarding

the costs and benefits of the proposed

amendments to the Exemptive Rules 111

and the proposed new rules. Six

commenters responded to our request

for comments on the cost-benefit

analysis. The commenters focused on a

number of issues, particularly the

independent counsel proposal and the

disclosure proposals. These comments

are addressed below.

A. Amendments to the Exemptive Rules

The Commission is adopting the

proposed amendments to the Exemptive

Rules and the proposed new rules, with

certain changes (together, the

‘‘Amendments’’). The Amendments

require that, for funds relying on those

rules: (i) independent directors

constitute a majority of their boards; (ii)

independent directors select and

nominate other independent directors;

and (iii) any legal counsel for the fund’s

independent directors be an

independent legal counsel. The

Amendments are designed to enhance

the independence and effectiveness of

independent directors, who are charged

with overseeing the fund’s activities and

transactions under the Exemptive Rules.

Boards that meet these conditions

should be more effective at exerting an

independent influence over fund

management. Their independent

directors should be more likely to have

their primary loyalty to the fund’s

shareholders rather than the adviser,

and should be better able to evaluate the

complex legal issues that are often faced

by fund boards with an independent

and critical eye. The Amendments,

therefore, should provide substantial

benefits to shareholders by helping to

ensure that independent directors are

better able to fulfill their role of

representing shareholder interests and

supplying an independent check on

management. While these benefits are

not easily quantifiable in terms of

dollars, we believe that they are real,

and that the Amendments will

strengthen the hand of independent

directors to the advantage of

shareholders.

The Amendments may impose some

costs on funds that choose to rely on the

Exemptive Rules. These costs are

discussed below. Funds that do not rely

on an Exemptive Rule, however, will

not be subject to the new conditions and

should not incur any costs associated

with those conditions.112

Independent directors as a majority of

the board. The Amendments require

funds to have independent directors

constitute a simple majority of their

boards in order to rely on the Exemptive

Rules. Because, as noted above, most

mutual funds today have boards with

independent majorities,113 it appears

that the Amendments will not impose

substantial costs on funds as a group.

Funds that currently do not have a

majority of independent directors on

their boards and that would like to rely

on the Exemptive Rules may incur some

costs. The Commission, however, has no

reasonable basis for estimating those

costs. Those funds could come into

compliance with the majority

requirement of the Amendments in a

number of ways. For example, funds

could: (i) Decrease the size of their

boards and allow some inside directors

to resign; (ii) maintain the current size

of their boards and replace some inside

directors with independent directors; or

(iii) increase the size of their boards and

elect new independent directors.

If new independent directors are

elected in order to comply with the

Amendments, the fund would incur the

costs of preparing a proxy statement and

holding a shareholder meeting to elect

those independent directors, as well as

the costs of compensating those

directors.114 The Commission, however,

has no reasonable basis for determining

how many funds that currently do not

have independent directors as a

majority of their boards will choose to

comply with the Amendments by

electing new independent directors.

Independent director self-selection

and self-nomination. The Amendments

require independent directors to select

and nominate any other independent

directors. This change should not

impose significant new costs on funds,

because many funds already have

adopted this practice.115 Although some

3746 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

116As discussed above, we are amending rule 0–

1 to include a definition of ‘‘independent legal

counsel.’’ See Proposing Release, supra note 3, at

n.87 and accompanying text; see also infra notes

120–125 and accompanying text (discussing the

costs and benefits of this proposed definition).

117 In connection with this new definition, we

also are amending rule 0–1 to define an

‘‘administrator’’ as any person who provides

significant administrative or business affairs

management services to a fund. This definition is

substantially similar to the definition of

administrator that is currently contained in Item

22(a)(1)(i) of Schedule 14A and Item 15(h)(1) of

Form N–1A. Adding this definition to rule 0–1

should benefit funds by helping to clarify the scope

of the definition of independent legal counsel. We

are not aware of any costs that would be associated

with this definition of administrator.

118We are amending rule 0–1 to define ‘‘control

person’’ as any person (other than a registered

investment company) directly or indirectly

controlling, controlled by, or under common

control with a fund’s investment adviser, principal

underwriter, or administrator. This definition

should benefit funds by helping to clarify the scope

of the definition of independent legal counsel. We

are not aware of any costs that would be associated

with this definition.

119Among other things, the Amendments require

that, for funds relying on those rules, any legal

counsel for the independent directors of the fund

be an ‘‘independent legal counsel.’’

120Based on statistics compiled by Commission

staff from January 1, 1997 through December 31,

1998, we estimate that there are approximately

3,560 funds that could rely on one or more of the

Exemptive Rules. Of those funds, we assume that

approximately 90 percent (3,200) actually rely on at

least one Exemptive Rule annually.

121We assume that the independent directors of

the remaining two-thirds of those funds (2,135) will

choose not to have counsel (but instead rely in

some circumstances on counsel who does not

represent them), so that no determination by the

independent directors would be necessary.

122This estimate is based on a staff assessment of

the burden associated with this proposed

recordkeeping requirement in light of the estimated

hour burdens currently associated with other rules

under the Act that impose similar collection of

information requirements.

123To calculate this total annual cost, the

Commission staff assumed that two-thirds of the

total annual industry hour burden (532 hours)

would be incurred by professionals with an average

hourly wage rate of $125 per hour, and one-third

of that annual hour burden (267 hours) would be

incurred by clerical staff with an average hourly

wage rate of $15 per hour ((532 × $125/hour) + (267

× $15/hour) = $70,505).

124The commenter argued that, using the

Commission’s estimate, if the 1,065 funds that make

a specific determination regarding ‘‘independent

legal counsel’’ retain separate new counsel to

represent them, the ‘‘total annual cost of the

Commission’s proposal will exceed $26 million’’

(assuming the average annual retainer for each

separate counsel will be $25,000). While we agree

that there may be additional costs imposed by rule

0–1 if a board finds its current counsel is not

independent and wishes to retain new counsel, it

is also likely that the cost of new counsel would

be partially offset by the lower amount of fees to

be paid to prior counsel. Some boards may decide

against appointing counsel. Moreover, the amended

rule is different from the proposed rule, and gives

the independent directors sole discretion to

determine whether their counsel is independent.

Thus, the overall additional costs should be far less

than those suggested by the commenter.

125This commenter suggested that there would be

additional costs associated with new counsel,

which would need to familiarize itself with the

fund, its charter documents, its contracts, the

service providers, and other information in order to

effectively represent the fund’s independent

directors. Similarly, the commenter stated that as

mergers and acquisitions of fund advisers

accelerate, many fund boards will increasingly have

to look to outside counsel as one of the few, if not

the only, source of continuity and institutional

knowledge. We agree that costs may be incurred if

the independent directors retain new counsel.

However, the Commission cannot predict with any

certainty how often this will occur, or the fees

charged by the new counsel. Moreover, as law firms

experience their own mergers, acquisitions, and

turnover of attorneys, new lawyers frequently must

familiarize themselves with the fund and its

operations. These are costs that law firms would

and might pass on to funds whether or not we adopt

the new rule.

The same commenter also expressed concern that

the Proposing Release did not factor the costs of law

firms to initially screen and thereafter continuously

monitor legal work performed to ensure continued

independence. Most law firms already screen and

monitor any new matters for conflicts of interest.

We do not believe that our rules will affect this

screening and monitoring, nor do we believe law

firms will have to establish new systems for the

initial screening and continued monitoring of

conflicts.

funds do not currently follow this

practice and will need to adopt it in

order to rely on the Exemptive Rules,

we are not aware of any costs that

would result from requiring a fund’s

incumbent independent directors to

select and nominate other independent

directors.

Independent legal counsel. Lastly, the

Amendments require any legal counsel

to a fund’s independent directors to be

an independent legal counsel.116 The

Amendments do not require

independent directors to retain legal

counsel, but do require any person that

acts as counsel to the independent

directors to qualify as an independent

legal counsel. Independent directors

who are represented by counsel who

does not meet the new definition of

‘‘independent legal counsel’’ thus may

have to retain different counsel if their

fund chooses to rely on any of the

Exemptive Rules. If a substitution of

counsel is necessary, it may lead to an

increase in costs as described below.

B. Definition of Independent Legal

Counsel

Rule 0–1 defines certain terms for

purposes of the rules and regulations

under the Investment Company Act.

The Commission is amending this rule

to add a definition of the term

‘‘independent legal counsel.’’ Under the

new definition, a person is an

independent legal counsel if a majority

of the fund’s independent directors

determine, in the exercise of their

business judgment, based on

information obtained from such person,

that any representation of the fund’s

adviser, principal underwriter,

administrator,117 or any of their control

persons 118 since the beginning of the

fund’s last two completed fiscal years is

unlikely to adversely affect the

professional judgment of the person in

providing legal representation to the

independent directors. The basis of the

independent directors’ determination is

required to be recorded in the minutes

of the directors’ meeting.

The new definition of ‘‘independent

legal counsel’’ should help to ensure

that independent directors’ counsel is

able to provide objective legal advice

concerning the complex legal issues

faced by those directors. This change

thus should benefit both shareholders

and independent directors by helping

those directors to better carry out their

responsibilities as shareholder

representatives. Shareholders also will

benefit from the requirement that the

independent directors’ determinations

be recorded in the minute books of the

fund, because this requirement will

enable the Commission staff to review

independent directors’ determinations

that their counsel qualifies as

independent legal counsel.

The new definition will impose costs

on some funds that rely on the

Exemptive Rules.119 We assume that

approximately 3,200 funds rely on at

least one of the Exemptive Rules

annually.120 We further assume that the

independent directors of approximately

one-third of those funds (1,065) would

be required to make the specified

determination in order for their counsel

to meet the definition of ‘‘independent

legal counsel.’’ 121 We estimate that each

of these 1,065 funds would be required

to spend, on average, 0.75 hours

annually to comply with the proposed

requirement that this determination be

recorded in the fund’s minute books,122

for a total annual burden of

approximately 799 hours. Based on this

estimate, the total annual cost to funds

of this new definition would be

approximately $70,505.123 We estimated

in the Proposing Release that the cost of

the new definition would be

approximately $70,505, and one

commenter argued that the actual cost of

the proposed definition would ‘‘far

exceed’’ that amount.124 Another

commenter stated that ‘‘there are likely

to be substantial costs incurred by funds

if they are forced to hire new counsel to

independent directors because counsel

has also represented the adviser.’’ 125

We do not believe the cost will ‘‘far

exceed’’ the estimated amount. The rule

relies solely on the independent

directors to make a good faith

determination that a person is an

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3747

126The ICI Mutual Insurance Company (‘‘ICI

Mutual’’), which insures funds representing

approximately 70 percent of all open-end fund

assets, announced last year that it was making

available to funds a standard policy endorsement

that permits independent directors to recover

defense costs, settlements, and judgments in

‘‘insured vs. insured’’ claims otherwise covered

under the policy. See Proposing Release, supra note

, at n.111. According to an ICI Mutual

representative, that company is not charging funds

any additional premiums for this coverage. It is

possible, however, that other insurance providers

might charge funds additional premiums for

providing this type of coverage.

127These conditions are designed to enable the

Commission staff to monitor the duties and

responsibilities of an independent audit committee

formed by a fund relying on the exemption. 128This estimate is based on statistics compiled

by Commission staff from January 1, 1997 through

December 31, 1998. 129This estimate is based on a review of the

estimated hour burdens currently associated with

other rules under the Act that impose similar

collection of information requirements. 130To calculate this one-time cost, the

Commission staff used $500 per hour as the average

cost of directors’ time and $125 per hour as an

average hourly wage for professionals ((2 hours ×

524 funds × $500/hour) + (2 hours × 524 funds ×

$125/hour) = $655,000).

131This estimate is based on a review of the

estimated hour burdens associated with other rules

under the Act that impose similar collection of

information requirements.

132To calculate the total annual cost of the

proposed rule, the Commission staff assumed that

one-third of the total annual hour burden (35 hours)

would be incurred by professionals with an hourly

wage rate of $125 per hour, and two-thirds of that

annual hour burden (70 hours) would be incurred

by clerical staff with an hourly wage rate of $15 per

hour ((35 × $125/hour) + (70 × $15/hour) = $5,425).

133 In some cases, funds pay these additional

committee fees only if the committee meeting is

held on a day when a board meeting is not

scheduled.

independent counsel. We are unable to

predict with any certainty how many

independent directors will obtain new

counsel because they determine that

their current counsel is not

‘‘independent.’’ Each evaluation of

counsel will be fact-specific, and each

board will have to make its own

determination with respect to its

counsel. Some independent directors

may choose not to hire their own legal

counsel. The costs of obtaining new

counsel also may be partially offset by

savings generated by reductions in

payment to current counsel, once they

cease providing their services to the

independent directors.

C. Suspension of Board Composition

Requirements

New rule 10e–1 will increase the

periods for which the independent

director minimum percentage

requirements of the Act, and of the rules

under the Act, are temporarily

suspended if the death, disqualification,

or bona fide resignation of an

independent director causes the

representation of independent directors

on the board to fall below that required

by the Act or our rules. The new rule

will benefit funds by helping to ensure

that if a fund’s board falls below the

independent director minimum

percentage requirements in these

circumstances, the fund will not

immediately face the severe

consequences of losing the availability

of the Exemptive Rules.

One commenter stated its opinion that

there will be significant costs imposed

on funds if the time periods suggested

in the Proposing Release were not

increased. We extended one of the

proposed time periods for rule 10e-1 in

response to concerns voiced by

commenters, and we believe that the

periods for which the rule would

suspend the independent director

minimum percentage requirements are

consistent with concerns for investor

protection. As amended, the new rule

appears not to have any costs for

investors or funds.

D. Limits on Coverage of Directors under

Joint Insurance Policies

Rule 17d–1(d)(7) under the Act

permits funds to purchase joint liability

insurance policies without first

obtaining a Commission order

permitting this joint arrangement,

provided that certain conditions are

met. The Commission is amending this

rule to make it available only for joint

liability insurance policies that do not

exclude coverage for independent

directors’ litigation expenses in the

event that they are sued by the fund’s

adviser. This change should benefit

shareholders by making it possible for

independent directors to engage in the

good faith performance of their

responsibilities under the Act and our

rules without concern for their personal

financial security. For the same reasons,

the rule change also should benefit

independent directors.

Because obtaining this type of

coverage may cause the premiums

charged by some insurance providers for

joint liability insurance policies to

increase, this amendment may have

some costs for funds.126 The

Commission, however, has no

reasonable basis for estimating the

possible increase in premiums that may

result from this proposal.

E. Independent Audit Committees

Section 32(a)(2) of the Act requires

that the selection of a fund’s

independent public accountant be

submitted to shareholders for

ratification or rejection. New rule 32a–

4 exempts a fund from this requirement

if the fund has an audit committee

consisting entirely of independent

directors to oversee the fund’s auditor.

The new rule could provide significant

benefits to shareholders. Many believe

shareholder ratification of a fund’s

independent auditor has become a

perfunctory process, with votes that are

rarely contested. As a consequence, we

believe that the ongoing oversight

provided by an independent audit

committee can provide greater

protection to shareholders than

shareholder ratification of the choice of

auditor. In addition, funds that rely on

section 32(a)(2) will no longer have to

obtain shareholder ratification or

rejection of their auditor on an annual

basis, and this change should save some

printing costs with respect to proxy

materials.

New rule 32a–4 may impose certain

costs on those funds that choose to rely

on the exemption. It appears that these

costs will likely be minimal and will be

justified by the relief provided by the

exemption. To rely on the exemption,

among other things, a fund’s board of

directors must adopt an audit committee

charter that sets forth the committee’s

structure, duties, powers, and methods

of operation, or similar audit committee

provisions must appear in the fund’s

charter or bylaws. The fund also must

preserve that charter, and any

modifications to the charter,

permanently in an easily accessible

place.127 We estimate that there are

approximately 3,490 investment

companies that may rely on the

proposed rule.128 We assume that

approximately 15 percent (524) of those

funds are likely to rely on the

exemption. For each of those funds, we

estimate that the adoption of the audit

committee charter would require, on

average, 2 hours of director time and 2

hours of professional time,129 for a total

one-time burden of approximately 2,096

hours, and a total one-time cost of

approximately $655,000.130 We also

estimate that each of the funds relying

on the rule would be required to spend

approximately 0.2 hours annually to

comply with the proposed requirement

that they preserve permanently their

audit committee charters,131 for an

additional total annual hour burden of

105 hours, and an additional total

annual cost of approximately $5,425.132

In addition, some funds pay their

directors an extra fee for each committee

on which they serve.133 Those funds

may incur the additional costs of audit

committee fees if they establish an audit

committee in order to rely on the

proposed exemption. Of those funds

likely to rely on the exemption,

however, we have no basis for

determining the number that would pay

3748 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

134We also have no basis for determining how

many funds would choose to avoid those fees by

scheduling audit committee meetings for the same

day as a board meeting.

135See supra Section I.E.2.

136One commenter argued that the Commission

failed to account for the costs to funds when

potential and existing directors are discouraged

from serving on fund boards due to the burdens of

the proposed disclosure amendments. The

commenter, however, failed to provide any

quantifiable data to support the commenter’s

argument. Moreover, in tailoring the disclosure

amendments to better achieve our goals, we have

addressed the concerns of commenters regarding

the scope of the disclosure requirements.

Another commenter noted that the Commission

failed to account for the legal costs associated with

increased litigation that would arise from the new

disclosure requirements. Again, the commenter

failed to provide any data for us to consider.

137This estimate was based on a staff assessment

of the different types of information required in

proxy statements.

138This estimate was based upon a staff

assessment of the proposed amendments in light of

the hour burden and reporting requirements at the

time of the Proposal Release.

As stated above, the additional hours were based

on the additional time funds would devote to

determining what information needs to be

disclosed, formulating queries for directors, and

preparing the disclosure documents.

139The estimated number of proxy statements

was based on the approximate number of proxy

their independent directors a separate

fee for service on the audit committee,

or the likely amount of those fees.134

F. Qualifications as an Independent

Director

New rule 2a19–3 should benefit

shareholders, funds, and independent

directors by working to prevent

qualified individuals from being

unnecessarily disqualified from serving

as independent directors. New rule

2a19–3 will benefit both funds and their

independent directors by clarifying the

status of independent directors who

own shares of index funds.

The Commission is not aware of any

costs to funds that would result from the

new rule. There also should be no costs

to investors because, consistent with

concerns for investor protection, the

new rule will not permit individuals

who have affiliations or business

interests that could impair their

independence to serve as independent

directors. The new rule applies to funds

that replicate a broad-based index or

indices, and does not include the five

percent threshold of the proposed rule,

and therefore funds will not have to

monitor the percentage of an index that

is made up of the securities of the fund’s

adviser, lead underwriter, or their

controlling persons.135

G. Disclosure of Information about Fund

Directors

In the Proposing Release, we analyzed

the costs and benefits of our proposals

and requested comment and data

regarding the costs and benefits of the

disclosure amendments. A few

commenters specifically addressed the

Commission’s estimates, and they

generally argued that the Proposing

Release underestimated the costs to be

incurred in connection with the

proposed amendments. The

commenters, however, did not provide

specific cost or benefit data in response

to the Proposing Release. As discussed

above, after careful consideration of the

comments we received in response to

our Proposing Release, we have tailored

the disclosure requirements to better

achieve our goals and also addressed the

concerns of commenters by modifying

the scope of the proposed disclosure

amendments.

The amendments to the proxy rules

and Forms N–1A, N–2, and N–3 will

provide fund investors with improved

information about directors. Because

independent directors are the

shareholders’ representatives and

advocates, shareholders have a

significant interest in knowing who the

independent directors are, whether the

independent directors’ interests are

aligned with shareholders’ interests,

whether the independent directors have

any conflicts of interest, and how the

directors govern the fund. This

information will help a fund

shareholder evaluate whether his

designated representatives can, in fact,

act as independent, vigorous, and

effective representatives.

We believe that the amendments

benefit investors in several ways. The

requirement that mutual funds disclose

basic information about directors in an

easy-to-read tabular format in the fund’s

annual report to shareholders, SAI, and

proxy statements for the election of

directors benefits shareholders by

ensuring that shareholders receive

information about the identity and

experience of their directors both

annually and whenever they are asked

to vote to elect directors. Moreover, this

information benefits prospective

investors who may obtain the

information, without charge, upon

request.

The amendments require that funds

disclose: (1) Each director’s ownership

in each fund that he oversees; and (2)

each director’s aggregate ownership in

any funds that he oversees within a

fund family. This information benefits

shareholders and prospective investors

by making available in the SAI

information that may show the

alignment of director interests with

those of shareholders. In addition,

shareholders also benefit by receiving

this information in the proxy statements

whenever they are asked to vote to elect

directors.

Our amendments regarding

circumstances that may raise conflict of

interest concerns for directors benefit

investors by enabling investors to

decide for themselves whether an

independent director would be an

effective advocate for shareholders.

Disclosure of this type of information

also results in its public dissemination,

bringing these circumstances to the

attention of fund shareholders, and

encouraging the selection of

independent directors who are

independent in the spirit of the Act.

Finally, this information assists the

Commission in determining whether to

exercise its authority under section

2(a)(19) of the Act to find that a person

is an interested person of a fund by

reason of having had, at any time since

the beginning of the last two completed

years of the fund, a material business or

professional relationship with the fund

and certain persons related to the fund.

The modifications to the disclosure

requirements of matters related to the

board’s role in governing a mutual fund

benefit shareholders by allowing them

to determine more readily whether the

directors are effectively representing

shareholders’ interests, independent of

fund management.

The amendments impose certain costs

on the fund industry. The costs

associated with the proposed

amendments include the resources

expended by funds in collecting the

information and preparing the

disclosure documents.136 Although we

have tailored the proposal to better

achieve our goals and to address the

concerns of commenters, we do not

believe that the overall cost burden of

the amendments was materially

affected.

Proxy Statements

The hour burden for preparing proxy

statements at the time of the Proposal

Release was 96.2 hours per proxy

statement, and we estimated that

approximately 1⁄3 of those hours—or 32

hours—are expended collecting and

disclosing information about directors

and nominees.137 We estimated the

additional burden hours that would be

imposed by the proposed disclosure

requirements to be 10 hours per proxy

statement.138

We estimate the annual industry cost

of the proposed amendments to the

proxy statements to be 10,000 hours, or

$1.25 million, based on an estimated

1,000 proxy statements that are filed

annually.139

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3749

statements filed with the Commission in calendar

year 1998. The total industry cost of the proposed

amendments to the proxy statement is calculated by

multiplying the annual number of proxy statements

(1,000) by the additional hour burden imposed by

the proposed amendments (10 hours) by the hourly

wage rate ($125). The hourly wage rate is based

upon consultations with a sample of filers and

represents the Commission’s estimate for an

appropriate wage rate for the legal, financial, and

accounting skills commonly used in preparation of

registration statements, shareholder reports, and

proxy statements. 140Our estimated hour burden would be high for

those portfolios that are part of a fund complex in

which multiple registered investment companies

have the same board of directors because the

burden of collecting and disclosing information

about the common board would be spread over a

larger number of portfolios.

141Although funds only have to update the

information about current directors and add

information about new directors, we anticipate that

funds will incur some burden hours in regularly

collecting information from directors, determining

what information needs to be disclosed, and

preparing the updated disclosure information.

142These estimates were based on filings received

in calendar year 1998.

143The total annual industry cost is calculated by

multiplying the total annual industry hour burden

((280 portfolios x 24 hours) + (7,875 portfolios x 4

hours)) by the hourly wage rate of $125.

144Although funds only have to update the

information about current directors and add

information about new directors, we anticipate that

funds will incur some burden hours in regularly

collecting information from directors, determining

what information needs to be disclosed, and

preparing the updated disclosure information.

145These estimates were based on filings received

in calendar year 1998.

146The total annual industry cost is calculated by

multiplying the total annual industry hour burden

((110 funds x 42 hours) + (20 funds x 7 hours)) by

the hourly wage rate of $125.

147Although funds would only have to update the

information about current directors and add

information about new directors, we anticipate that

funds would incur some burden hours in regularly

collecting information from directors, determining

what information needs to be disclosed, and

preparing the updated disclosure information.

148These estimates were based on filings received

in calendar year 1998.

149The total annual industry cost is calculated by

multiplying the total annual industry hour burden

((20 portfolios x 10.5 hours) + (40 portfolios x 1.75

hours)) by the hourly wage rate of $125.

150This estimate was based on statistics compiled

by Division staff from January 1, 1997 through

December 31, 1998.

151The industry cost of the proposed annual

shareholder reporting requirements is calculated by

multiplying the total annual hour burden for the

industry (0.5 hours x 3,490 registered management

investment companies) by the hourly wage rate of

$125.

Registration Statements

Because the information to be

disclosed in the registration statements

is the same as in the proxy statements,

we believe that the hour burden for the

amendments per registration statement

will be approximately the current hour

burden for collecting and disclosing

director information under the current

proxy rules plus the hour burden for the

proposed amendments to the proxy

rules. As stated above, we estimated the

current hour burden for collecting and

disclosing information about directors

and nominees in proxy statements to be

32 hours per proxy statement and the

burden hours for collecting and

disclosing the enhanced information

about directors and nominees to be 10

hours per proxy statement, for a total of

42 hours.

Form N–1A

The hour burden for Form N–1A is on

a per portfolio basis and not per

registration statement filed with the

Commission. Based on the staff’s

experience with Form N–1A, we

estimate that there are approximately

1.75 portfolios per registration statement

filed on Form N–1A. The average hour

burden per portfolio for disclosing the

information about directors will be the

hour burden per registration statement

(42) divided by the average number of

portfolios per registrant (1.75), or 24

hours per portfolio.140 Because mutual

funds only have to update information

in post-effective amendments, we

expect the hour burden to be 1⁄6 of the

hours expended for the initial

registration statement, or 4 hours per

portfolio for post-effective

amendments.141

In the Proposing Release, we

estimated that 280 portfolios file initial

registration statements and 7,875

portfolios file post-effective

amendments annually on Form N–

1A.142 Thus, we estimate the annual

industry cost of the amendments to

Form N–1A to be 38,220 hours, or $4.78

million.143

Form N–2

The hour burden for Form N–2 is on

a per registration statement basis

because funds registering on Form N–2

register one portfolio per registration

statement. Because the disclosure will

be the same for Form N–2 as for Form

N–1A, except that it would be for one

portfolio per registration statement, we

estimated the additional hour burden

for the proposed amendments to be 42

hours for each initial registration

statement. Because funds only have to

update information in post-effective

amendments, we expect that the hour

burden to be approximately 1⁄6 of the

hours expended for the initial

registration statement, or 7 hours per

post-effective amendment.144

In the Proposing Release, we

estimated that 110 funds file initial

registration statements and 20 file posteffective amendments annually on Form

N–2.145 Thus, we estimate the annual

industry cost of the amendments to

Form N–2 to be 4,760 hours, or

$595,000.146

Form N–3

The hour burden for Form N–3 is on

a per portfolio basis and not per

registration statement filed with the

Commission. Based on the Commission

staff’s experience with Form N–3, we

estimate that there are approximately 4

portfolios per investment company

registering on Form N–3. The average

hour burden per portfolio for disclosing

the information about directors will be

the hour burden per registration

statement (42) divided by the

approximate number of portfolios per

registrant (4), or 10.5 hours per

portfolio. Because funds only have to

update information in post-effective

amendments, we expect that the hour

burden would be 1⁄6 of the hours

expended for the initial registration

statement, or 1.75 hours per portfolio for

post-effective amendments.147

In the Proposing Release, we

estimated that 20 portfolios file initial

registration statements and 40 portfolios

file post-effective amendments annually

on Form N–3.148 Thus, we estimate the

annual industry cost of the amendments

to Form N–3 to be 280 hours, or

$35,000.149

Shareholder Reports

Because the disclosure of basic

tabular information, which is required

in annual shareholder reports, is a

subset of the information that would be

required in the initial registration

statement of a fund and any posteffective amendments, we expect that

the annual burden for complying with

the proposed amendments to the

shareholder report requirements would

be minimal. Based upon the amount of

information to be disclosed, we estimate

that the hour burden would be one-half

hour per investment company for each

annual shareholder report. In the

Proposing Release, we estimated that

there were 3,490 management

investment companies that are subject

to the annual report requirements.150

Thus, we estimate the annual industry

cost of the proposed amendments for

annual shareholder reports to be 1,745

hours, or $218,125.151

H. Recordkeeping Regarding Director

Independence

The Commission also is amending

rule 31a–2 under the Act, which

requires funds to preserve certain

records for specified periods of time.

The amendments to rule 31a–2 require

funds to preserve for a period of at least

six years any record of: (i) The initial

determination that a director qualifies as

3750 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

152Commission staff surveyed representatives of

several funds to determine the current burden hour

estimate for rule 31a–2. 153This estimate is based on statistics compiled

by Commission staff from January 1, 1997 through

December 31, 1998. 154This estimate is based on a Commission staff

assessment of the hour burden that would be

imposed by the proposed amendment in light of the

estimated hour burden currently imposed by the

requirements of the rule. 155 In calculating the total annual industry cost of

the proposed amendment, the Commission staff

assumed that one-third of the total annual industry

hour burden (233 hours) would be incurred by

professionals with an average hourly wage rate of

$125 per hour, and two-thirds of that annual hour

burden (465 hours) would be incurred by clerical

staff with an average hourly wage rate of $15 per

hour ((233 x $125/hour) + (465 x $15/hour) =

$36,100). 156 15 U.S.C. 80a–2(c), 77b(b), and 78c(f).

157One commenter did assert that an additional

250 hours would be required to convert the new

disclosure requirements into ‘‘plain English’’ in

order for funds to obtain accurate information from

directors. In light of the modifications to the

disclosure requirements discussed above, which

simplified the disclosure requirements, we believe

that our estimates remain appropriate.

158For example, in determining the burden hour

for preparing proxy statements, we explained that

the then current hour burden for preparing proxy

statements was 96.2 hours per proxy statement, and

we estimated that approximately 1⁄3 of those

hours—or 32 hours—were expended collecting and

disclosing information about directors and

nominees. We estimated that an additional 10

burden hours per proxy statement would be

imposed by the proposed disclosure requirements.

an independent director; (ii) each

subsequent determination of whether

the director continues to qualify as an

independent director; and (iii) the

determination that any person who is

acting as legal counsel to the

independent directors is an

independent legal counsel. These

amendments should benefit both

shareholders and the Commission by

enabling the Commission’s staff to

monitor the independent directors’

determination of whether their counsel

is independent.

The amendments will impose certain

minimal costs on funds. The

Commission staff estimates that each

fund currently spends about 27.8 hours

per year complying with the record

preservation requirements of rule

31a–2.152 Approximately 3,490 funds

would be affected by the proposal to

amend the rule to require funds to

preserve records regarding the

independence of their directors.153 The

Commission staff estimates that each of

those funds would be required to spend

an additional 0.2 hours annually to

comply with the proposed

amendment,154 for a total additional

burden for all funds of approximately

698 hours. Based on this estimate, the

total annual cost for all funds of the

proposed amendment to rule 31a–2

would be $36,100.155 The estimated

costs related to the determination of

counsel’s independence are discussed

above in section IV.B. The Commission

is not aware of any other costs that

would result from the proposed

amendments to rule 31a–2.

V. Effects on Efficiency, Competition

and Capital Formation

Section 2(c) of the Investment

Company Act, section 2(b) of the

Securities Act, and section 3(f) of the

Exchange Act require the Commission,

when engaging in rulemaking that

requires it to consider or determine

whether an action is consistent with the

public interest, to consider, in addition

to the protection of investors, whether

the action will promote efficiency,

competition and capital formation.156

The Commission has considered these

factors.

Independent directors have

significant responsibilities under the

Investment Company Act and the

Exemptive Rules. The new rules and

amendments are intended to enhance

the independence and effectiveness of

independent directors so that they can

perform these responsibilities capably

and well. The new rules and rule

amendments should promote capital

formation by bolstering investors’

confidence in the ability of independent

directors to represent their interests

effectively. When investors are

confident that their interests are duly

considered by those responsible for the

operation of the mutual funds in which

they invest, they are more likely to

continue to rely on mutual funds as a

vehicle for savings and investment. The

new rules and rule amendments should

promote efficiency and competition by

enhancing the ability of fund

independent directors to scrutinize fund

operations and protect funds from

inefficiencies inherent when a fund is

operated to promote the interests of

persons other than those who have

invested in the fund.

As discussed above, shareholders

have a significant interest in knowing

who the independent directors are,

whether the independent directors’

interests are aligned with shareholders’

interests, whether the independent

directors have any conflicts of interest,

and how the directors govern the fund.

This information helps a fund

shareholder to evaluate whether the

independent directors can, in fact, act as

an independent, vigorous, and effective

force in overseeing fund operations. The

disclosure amendments were designed

to ensure that shareholders have the

information necessary to make such

evaluations.

It is unclear whether the disclosure

amendments will promote the efficiency

of funds since the disclosure

amendments do not change the

operation of funds. The disclosure

amendments, however, may promote

competition among funds since

shareholders will now be better

equipped to evaluate the effectiveness of

fund boards among various funds before

making their investment decisions. The

disclosure amendments also may

promote capital formation as the

disclosure amendments may provide

potential investors greater confidence to

invest in funds knowing that the

interests of the independent directors

overseeing the funds are aligned with

their own.

VI. Paperwork Reduction Act

As explained in the Proposing

Release, certain provisions of Forms N–

1A, N–2, and N–3, and rules 0–1, 20a–

1, 30e–1, 31a–2, and 32a–4 under the

Investment Company Act, and Schedule

14A under the Exchange Act contain

‘‘collection of information’’

requirements within the meaning of the

Paperwork Reduction Act of 1995 [44

U.S.C. 3501–3520.]. We published

notice soliciting comments on the

collection of information requirements

in the Proposing Release and submitted

these requirements to the Office of

Management and Budget (‘‘OMB’’) for

review in accordance with 44 U.S.C.

3507(d) and 5 CFR 1320.11.

As discussed above, we are adopting

the disclosure amendments with several

modifications designed to tailor the

amendments more closely to our goal of

providing shareholders with better

information to evaluate the independent

directors. Specifically, we are adopting

disclosure amendments that will require

funds to disclose: (1) Basic information

about directors in an easy-to-read

tabular format; (2) fund shares owned by

directors; (3) conflicts of interest

information regarding independent

directors; and (4) information on the

board’s role in governing the fund.

A few commenters specifically

addressed the burden hours the

Commission estimated funds would

incur to satisfy the proposed disclosure

requirements, generally stating that

these estimates were too low. These

commenters, however, did not provide

the Commission with any specific

quantitative data regarding burden

hours.157 As discussed in the Proposing

Release, the Commission staff estimated

the burden hours that would be

necessary under the proposed

disclosure amendments by assessing a

variety of factors.158 After careful

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3751

This estimate was based upon a Commission staff

assessment of the proposed amendments in light of

the then current hour burden and current reporting

requirements. We explained that the additional

hours were based on the additional time funds

would devote to determining what information

needs to be disclosed and preparing the disclosure

documents.

159We note that since issuing the Proposing

Release, the Commission issued a proposal on

Disclosure of Mutual Fund After-Tax Returns,

Investment Company Act Release No. 24339 (March

15, 2000) [65 FR 15500 (March 22, 2000)]. The

proposal would result in an increase in burden

hours of 109,591 for Form N–1A and 17,100 burden

hours for rule 30e–1 due to the proposed

amendments relating to after-tax disclosure.

160These amendments require that, for funds

relying on any of the Exemptive Rules, (i)

independent directors constitute a majority of the

fund’s board of directors; (ii) independent directors

select and nominate other independent directors;

and (iii) any legal counsel for the independent

directors be an independent legal counsel. In

connection with these amendments, we also are

amending rule 0–1 under the Act to add definitions

of the terms ‘‘independent legal counsel’’ and

‘‘administrator.’’

161The Commission continues to estimate that

the addition of the definition of the term

‘‘independent legal counsel’’ to rule 0–1 will

require the independent directors of approximately

1,065 funds to spend, on average, 0.75 hours

annually to determine whether their counsel meets

the definition of ‘‘independent legal counsel,’’ for

a total annual burden of approximately 799 hours.

See Proposing Release, supra note 3, at nn.287–290

and accompanying text.

In addition, the Commission estimates that the

amendments to rule 31a–2, which require funds to

preserve records regarding the independence of

their directors and counsel, will require

approximately 3,490 investment companies to

spend an additional 0.2 hours annually to comply

with the collection of information requirements of

rule 31a–2, for a total additional burden for all

funds of approximately 698 hours. See Proposing

Release, supra note 3, at nn.310–312 and

accompanying text.

The Commission also estimates that new rule

32a–4, which provides an exemption from the

requirement in section 32(a)(2) of the Act that the

selection of a fund’s independent public accountant

be submitted to shareholders for ratification or

rejection, will be relied upon by approximately 524

funds, for a total one-time burden of 2,096 hours

and an additional annual hour burden of 105 hours.

See Proposing Release, supra note 3, at nn.313–314

and accompanying text.

162 In connection with the adoption of this

requirement, we also are defining the term

‘‘independent legal counsel.’’

consideration of these comments, as

well as the modifications made to the

amendments as proposed, we continue

to believe that our estimates are

appropriate.159

The rule amendments we are adopting

in this Release include amendments to

the Exemptive Rules that are designed

to enhance the independence and

effectiveness of fund independent

directors.160 The changes also include

new rules and rule amendments that

will prevent qualified individuals from

being unnecessarily disqualified from

serving as independent directors,

protect independent directors from the

costs of legal disputes with fund

management, permit the Commission to

monitor the independence of directors

by requiring funds to preserve records of

their assessments of director

independence, and temporarily suspend

the independent director minimum

percentage requirements if a fund falls

below the required percentage due to an

independent director’s death or

resignation. In addition, the

Commission is exempting funds from

the requirement that shareholders ratify

or reject the directors’ selection of an

independent public accountant, if the

fund establishes an audit committee

composed entirely of independent

directors.

In the Proposing Release, the

Commission estimated the burden hours

that would be necessary for the

collection of information requirements

under the proposed amendments to the

rules under the Act. Although no

commenters specifically addressed the

burden estimates for the collection of

information requirements, a few

commenters responding to the costbenefit analysis in the Proposing

Release generally stated that we had

underestimated the burden hours. These

commenters, however, did not provide

an estimate of the burden hours

associated with the proposed rule

changes. We continue to believe that the

estimates of the burden hours contained

in the Proposing Release are

appropriate.161

OMB approved the collection

requirements contained in the forms

and rules. Forms N–1A (OMB Control

No. 3235–0307), N–2 (OMB Control No.

3235–0026), and N–3 (OMB Control No.

3235–0316) were adopted pursuant to

section 8(a) of the Investment Company

Act [15 U.S.C. 80a–8] and section 5 of

the Securities Act [15 U.S.C. 77e]. Rule

0–1 was adopted pursuant to section

38(a) of the Investment Company Act

[15 U.S.C. 80a–37(a)]. Rule 20a–1 (OMB

Control No. 3235–0158) and rule 30e–1

(OMB Control No. 3235–0025) were

promulgated under sections 20(a) and

30(e) [15 U.S.C. 80a–20 and 80a–29],

respectively, of the Investment

Company Act. Rule 31a–2 (OMB Control

No. 3235–0179) was adopted under

sections 31 [15 U.S.C. 80a–30] and 38(a)

of the Investment Company Act. Rule

32a–4 (Control No. 3235–0530) was

adopted under sections 6(c) [15 U.S.C.

80a–6(c)] and 38(a) of the Investment

Company Act.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless it displays a currently valid

control number. Compliance with the

disclosure requirements is mandatory.

Responses to the disclosure

requirements will not be kept

confidential.

VII. Summary of Final Regulatory

Flexibility Analysis

A Final Regulatory Flexibility

Analysis (‘‘FRFA’’) has been prepared in

accordance with 5 U.S.C. 604. The

Commission proposed new rules 2a19–

3, 10e–1 and 32a–4, and amendments to

rules 0–1, 2a19–1, 10f–3, 12b–1, 15a–4,

17a–7, 17a–8, 17d–1, 17e–1, 17g–1, 18f–

3, 23c–3, 30d–1, 30d–2, and 31a–2, and

requested comments on the new rules

and amendments in the Proposing

Release. The Commission prepared an

Initial Regulatory Flexibility Analysis

(‘‘IRFA’’) in accordance with 5 U.S.C.

603 in conjunction with the Proposing

Release, which was made available to

the public. The Proposing Release

summarized the IRFA and solicited

comments on it. No comments

specifically addressed the IRFA.

A. Need for the Rules and Rule

Amendments

1. Amendments to Exemptive Rules

Fund boards of directors have

significant responsibilities to protect

investors under state law, the

Investment Company Act, and many of

our rules. Independent directors, in

particular, represent the interests of

fund shareholders. They serve as

‘‘independent watchdogs,’’ guarding

investor interests. We are amending

certain Exemptive Rules to require that,

for funds relying on those rules:

• Independent directors constitute a

majority of the fund’s board of directors;

• Independent directors select and

nominate other independent directors;

and

• Any legal counsel for the fund’s

independent directors be an

‘‘independent legal counsel.’’162

We also are adopting rules and rule

amendments that will prevent qualified

individuals from being unnecessarily

disqualified from serving as

independent directors, protect

independent directors from the costs of

legal disputes with fund management,

permit us to monitor the independence

of directors by requiring funds to keep

records of their assessments of director

independence, and temporarily suspend

the independent director minimum

percentage requirements if a fund falls

below the required percentage due to an

independent director’s death or

resignation. In addition, we are

exempting funds from the requirement

that shareholders ratify or reject the

directors’ selection of an independent

public accountant, if the fund

3752 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

163We note that few, if any, insurance company

separate accounts registered on Form N–3 have

assets of less than $50 million when separate

account assets are aggregated with the assets of the

sponsoring insurance company. 164See supra note and accompanying text.

establishes an audit committee

composed entirely of independent

directors.

2. Disclosure Requirements

In reevaluating our current disclosure

requirements about fund directors, we

concluded that, while our fundamental

approach has been sound, there are

several gaps in the information that

shareholders currently receive about

directors. We are, therefore, requiring

that funds provide better information

about directors, including:

• Basic information about the identity

and business experience of directors;

• Fund shares owned by directors;

• Information about directors that

may raise conflict of interest concerns;

and

• The board’s role in governing the

fund.

We are adopting the disclosure

amendments with several modifications

designed to tailor the amendments more

closely to our goal of providing

shareholders with better information to

evaluate the independent directors.

B. Significant Issues Raised by Public

Comment

The Commission requested comment

on the IRFA, but we received no

comments specifically addressing the

analysis. Several commenters, however,

asserted that the financial costs of the

amendments to the rules under the Act

would have a greater impact on funds

that are small entities. Those

commenters did not, however, provide

an estimate of the costs to small entities.

A few commenters stated that the

disclosure amendments, as proposed,

would disadvantage smaller funds.

Two commenters argued that the

proposed fund ownership disclosure

would disadvantage directors of smaller

funds as these funds are more likely to

be stand-alone funds or part of a fund

complex with fewer funds, thereby

reducing the likelihood that such funds

would meet directors’ particular

investment objectives. We have

addressed this concern by modifying the

proposal to require that funds disclose

each director’s ownership in each fund

that he oversees and each director’s

aggregate ownership in any funds that

he oversees within a his fund family.

Although we understand that directors

of smaller funds will still have fewer

funds from which to choose, limiting

fund ownership disclosure to those

funds that a director oversees within the

same complex should help reduces the

disadvantage to directors of smaller

funds and still provide investors with

information to assess whether a

director’s interests are aligned with their

own..

We also narrowed the scope of

immediate family members and related

persons in recognition of the

overbreadth of our proposal in certain

circumstances, which should alleviate

concerns that the conflicts of interest

disclosure requirements would

discourage directors from serving on

fund boards.

C. Small Entities Subject to the Rules

As of December 1999, approximately

299 funds met the Commission’s

definition of small entity for purposes of

the Investment Company Act.163

The amendments to the Exemptive

Rules will affect funds, including any

small entities that rely on the Exemptive

Rules and do not already meet the new

conditions to those rules. Although it

appears that funds may incur certain

costs in complying with those

conditions, the Commission does not

have a reasonable basis for estimating

those costs. Other rule amendments are

not expected to have a significant

economic impact on funds, including

those that are small entities.

As discussed above, we are adopting

the disclosure amendments with several

modifications designed to tailor the

amendments more closely to our goal of

providing shareholders with better

information to evaluate the independent

directors. In doing so, we have

narrowed the scope of the disclosure

requirements that were proposed and

that would have applied to small

entities.

D. Projected Reporting, Recordkeeping,

and Other Compliance Requirements

1. Investment Company Act Rule

Amendments

The amendment to rule 17d–1(d)(7),

and new rules 10e–1 and 2a19–3, will

not impose any new reporting,

recordkeeping or compliance

requirements. The amendments to the

Exemptive Rules also will not impose

any new reporting or recordkeeping

requirements, but will impose three new

compliance requirements. For funds

relying on the Exemptive Rules, the

amendments require that: (i)

Independent directors constitute a

majority of the fund’s board of directors;

(ii) independent directors select and

nominate other independent directors;

and (iii) any legal counsel for the fund’s

independent directors be an

independent legal counsel. Although it

appears that there may be certain costs

to funds, including those that are small

entities, associated with complying with

these requirements, the Commission

does not have a reasonable basis for

estimating those costs.

2. Disclosure Amendments

As noted in our Paperwork Reduction

Act Analysis, a few commenters argued

that we had underestimated the costs of

complying with the proposed rules and

amendments.164 In addition, several

commenters stated that compliance with

the proposed rules and amendments

would have a greater impact on small

entities. However, none of the

commenters provided an estimate of the

impact on small entities, and how it

would differ from the impact on larger

entities.

E. Agency Action to Minimize Effects on

Small Entities

1. Investment Company Act Rule

Amendments

With respect to the amendments to

the rules under the Act, we believe that

establishing different requirements that

are applicable specifically to small

entities is inconsistent with the

protection of investors. We also believe

that adjusting the new rules and rule

amendments to establish different

compliance requirements for small

entities could undercut the purpose of

the changes: to enhance the

effectiveness of independent directors of

all funds, and thus better enable those

directors to fulfill their role of

protecting shareholder interests.

2. Disclosure Amendments

With respect to the disclosure

requirements, the Commission believes

that special compliance or reporting

requirements for small entities would

not be appropriate or consistent with

investor protection. The disclosure

amendments give shareholders and the

public greater access to information

about directors. Different disclosure

requirements for small entities, such as

reducing the level of disclosure that

small entities would have to provide

shareholders, would create the risk that

shareholders would not receive

adequate information about their

independent directors. The Commission

believes it is important for shareholders

and the public to receive this

information about directors for all

funds, not just for funds that are not

considered small entities. Shareholders

in small funds should have information

about their directors and would benefit

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3753

from this information as much as

shareholders in larger funds.

Consolidating or simplifying

compliance requirements for small

entities or exempting small entities from

any or all of the disclosure requirements

would be inconsistent with the

Securities Act, the Exchange Act, the

Investment Company Act, and investor

protection. If we do not require certain

information for small entities, this could

create the risk that investors in small

funds might not receive important

information about their directors. The

Commission also notes that current

disclosure requirements in the proxy

statements and registration statements

do not distinguish between small

entities and other funds. In addition, the

Commission believes it would be

inappropriate to impose a different

timetable on small entities for

complying with the requirements.

The Commission believes that the

amendments will not adversely affect

small entities. The new disclosure

requirements modify the existing

disclosure requirements in proxy

statements and registrations statements.

In addition, the Commission believes

that any additional impact on small

entities will be outweighed by the

benefits to shareholders and the public

of having greater access to the

information. Further consolidation or

simplification of disclosure

requirements for small entities, or use of

performance standards to specify

different requirements for small entities

would not be consistent with the

objectives of the Investment Company

Act.

The FRFA is available for public

inspection in File No. S7–23–99, and a

copy may be obtained by contacting

Peter M. Hong, Special Counsel, at (202)

942–0721, Office of Disclosure

Regulation, Division of Investment

Management, Securities and Exchange

Commission, 450 5th Street, N.W.,

Washington, D.C. 20549–0506.

VIII. Statutory Authority

The Commission is adopting rules

2a19–3, 10e–1, and 32a–4, and

amendments to rules 0–1, 2a19–1, 10f–

3, 12b–1, 15a–4, 17a–7, 17a–8, 17d–1,

17e–1, 17g–1, 18f–3, 23c–3, 30d–1, 30d–

2, and 31a–2 pursuant to authority set

forth in sections 6(c), 10(e), 30(e), 31,

and 38(a) of the Investment Company

Act [15 U.S.C. 80a–6(c), 80a–10(e), 80a–

29(e), 80a–30, 80a–37(a)]. The

Commission is adopting amendments to

Schedule 14A pursuant to authority set

forth in sections 14 and 23(a)(1) of the

Exchange Act [15 U.S.C. 78n, 78w(a)(1)]

and sections 20(a) and 38 of the

Investment Company Act [15 U.S.C.

80a–20(a), 80a–37]. The Commission is

adopting amendments to Forms N–1A,

N–2, and N–3 pursuant to authority set

forth in sections 5, 6, 7, 10, and 19(a)

of the Securities Act [15 U.S.C. 77e, 77f,

77g, 77j, 77s(a)] and sections 8, 24(a),

30, and 38 of the Investment Company

Act [15 U.S.C. 80a–8, 80a–24(a), 80a–29,

80a–37].

List of Subjects

17 CFR Parts 239 and 240

Reporting and recordkeeping

requirements, Securities.

17 CFR Parts 270 and 274

Investment companies, Reporting and

recordkeeping requirements, Securities.

Text of Final Rules and Forms

For the reasons set out in the

preamble, Title 17, Chapter II of the

Code of Federal Regulations is amended

as follows:

PART 240—GENERAL RULES AND

REGULATIONS, SECURITIES

EXCHANGE ACT OF 1934

1. The authority citation for Part 240

continues to read, in part, as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j,

77s, 77z–2, 77eee, 77ggg, 77nnn, 77sss, 77ttt,

78c, 78d, 78f, 78i, 78j, 78j–1, 78k, 78k–1, 78l,

78m, 78n, 78o, 78p, 78q, 78s, 78u–5, 78w,

78x, 78ll(d), 78mm, 79q, 79t, 80a–20, 80a–23,

80a–29, 80a–37, 80b–3, 80b–4 and 80b–11,

unless otherwise noted.

* * * * *

2. Section 240.14a–101 is amended as

follows:

a. Redesignating paragraphs (e) and

(d) of Item 7 as paragraphs (d) and (e)

of Item 7;

b. In newly redesignated paragraph

(d)(1) of Item 7, removing the third and

fourth sentence;

c. In newly redesignated paragraph

(d)(3)(iv)(A)(2) of Item 7, revise the

phrase ‘‘paragraph (e)(3)(iv)(A)(2)’’ to

read ‘‘paragraph (d)(3)(iv)(A)(2)’’;

d. In newly redesignated paragraphs

(d)(3)(v), (d)(3)(vi) and (d)(3)(vii) of Item

7, revise the phrase ‘‘paragraph (e)(3)’’

to read ‘‘paragraph (d)(3)’’;

e. Revising newly redesignated

paragraph (e) of Item 7;

f. Revising Item 8(d), before the

Instruction, revising ‘‘Item 22(b)(6)’’ to

read ‘‘Item 22(b)(13)’’;

g. In the Instruction following Item

10(a)(2)(ii)(A), revising ‘‘Item 22(b)(6)’’

to read ‘‘Item 22(b)(13)’’;

h. In the Instruction following Item

10(b)(1)(ii), revising ‘‘Item 22(b)(6)(ii)’’

to read ‘‘Item 22(b)(13)’’;

i. Revising paragraph (a)(1)(i) of Item

22;

j. In Item 22, redesignating paragraphs

(a)(1)(iv), (v), (vi), (vii), and (viii) as

paragraphs (a)(1)(v), (vi), (ix), (x), and

(xii);

k. In Item 22, adding new paragraphs

(a)(1)(iv), (vii), (viii), and (xi);

l. In Item 22, revising newly

designated paragraph (a)(1)(x); and

m. Revising paragraph (b) of Item 22.

These additions and revisions read as

follows:

§ 240.14a–101 Schedule 14A. Information

required in proxy statement.

* * * * *

Item 7. Directors and executive officers

* * * * *

(e) In lieu of paragraphs (a) through (d)(2)

of this Item, investment companies registered

under the Investment Company Act of 1940

(15 U.S.C. 80a) must furnish the information

required by Item 22(b) of this Schedule 14A.

* * * * *

Item 22. Information required in investment

company proxy statement.

(a) * * *

(1) * * *

(i) Administrator. The term

‘‘Administrator’’ shall mean any person who

provides significant administrative or

business affairs management services to a

Fund.

* * * * *

(iv) Family of Investment Companies. The

term ‘‘Family of Investment Companies’’

shall mean any two or more registered

investment companies that:

(A) Share the same investment adviser or

principal underwriter; and

(B) Hold themselves out to investors as

related companies for purposes of investment

and investor services.

* * * * *

(vii) Immediate Family Member. The term

‘‘Immediate Family Member’’ shall mean a

person’s spouse; child residing in the

person’s household (including step and

adoptive children); and any dependent of the

person, as defined in section 152 of the

Internal Revenue Code (26 U.S.C. 152).

(viii) Officer. The term ‘‘Officer’’ shall

mean the president, vice-president, secretary,

treasurer, controller, or any other officer who

performs policy-making functions.

* * * * *

(x) Registrant. The term ‘‘Registrant’’ shall

mean an investment company registered

under the Investment Company Act of 1940

(15 U.S.C. 80a) or a business development

company as defined by section 2(a)(48) of the

Investment Company Act of 1940 (15 U.S.C.

80a–2(a)(48)).

(xi) Sponsoring Insurance Company. The

term ‘‘Sponsoring Insurance Company’’ of a

Fund that is a separate account shall mean

the insurance company that establishes and

maintains the separate account and that owns

the assets of the separate account.

* * * * *

(b) Election of Directors. If action is to be

taken with respect to the election of directors

of a Fund, furnish the following information

in the proxy statement in addition to the

information (and in the format) required by

3754 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

paragraphs (f) and (g) of Item 7 of Schedule

14A.

Instructions to introductory text of

paragraph (b). 1. Furnish information with

respect to a prospective investment adviser to

the extent applicable.

2. If the solicitation is made by or on behalf

of a person other than the Fund or an

investment adviser of the Fund, provide

information only as to nominees of the

person making the solicitation.

3. When providing information about

directors and nominees for election as

directors in response to this Item 22(b),

furnish information for directors or nominees

who are or would be ‘‘interested persons’’ of

the Fund within the meaning of section

2(a)(19) of the Investment Company Act of

1940 (15 U.S.C. 80a–2(a)(19)) separately from

the information for directors or nominees

who are not or would not be interested

persons of the Fund. For example, when

furnishing information in a table, you should

provide separate tables (or separate sections

of a single table) for directors and nominees

who are or would be interested persons and

for directors or nominees who are not or

would not be interested persons. When

furnishing information in narrative form,

indicate by heading or otherwise the

directors or nominees who are or would be

interested persons and the directors or

nominees who are not or would not be

interested persons.

4. No information need be given about any

director whose term of office as a director

will not continue after the meeting to which

the proxy statement relates.

(1) Provide the information required by the

following table for each director, nominee for

election as director, Officer of the Fund,

person chosen to become an Officer of the

Fund, and, if the Fund has an advisory board,

member of the board. Explain in a footnote

to the table any family relationship between

the persons listed.

(1) (2) (3) (4) (5) (6)

Name, Address, and

Age.

Position(s) Held with

Fund.

Term of Office and

Length of Time

Served.

Principal Occupation(s) During Past

5 Years.

Number of Portfolios

in Fund Complex

Overseen by Director or Nominee for

Director.

Other Directorships

Held by Director or

Nominee for Director

Instructions to paragraph (b)(1). 1. For

purposes of this paragraph, the term ‘‘family

relationship’’ means any relationship by

blood, marriage, or adoption, not more

remote than first cousin.

2. No nominee or person chosen to become

a director or Officer who has not consented

to act as such may be named in response to

this Item. In this regard, see Rule 14a–4(d)

under the Exchange Act (§ 240.14a–4(d)).

3. If fewer nominees are named than the

number fixed by or pursuant to the governing

instruments, state the reasons for this

procedure and that the proxies cannot be

voted for a greater number of persons than

the number of nominees named.

4. For each director or nominee for election

as director who is or would be an ‘‘interested

person’’ of the Fund within the meaning of

section 2(a)(19) of the Investment Company

Act of 1940 (15 U.S.C. 80a–2(a)(19)),

describe, in a footnote or otherwise, the

relationship, events, or transactions by

reason of which the director or nominee is

or would be an interested person.

5. State the principal business of any

company listed under column (4) unless the

principal business is implicit in its name.

6. Include in column (5) the total number

of separate portfolios that a nominee for

election as director would oversee if he were

elected.

7. Indicate in column (6) directorships not

included in column (5) that are held by a

director or nominee for election as director

in any company with a class of securities

registered pursuant to section 12 of the

Exchange Act (15 U.S.C. 78l), or subject to

the requirements of section 15(d) of the

Exchange Act (15 U.S.C. 78o(d)), or any

company registered as an investment

company under the Investment Company Act

of 1940, (15 U.S.C. 80a), as amended, and

name the companies in which the

directorships are held. Where the other

directorships include directorships

overseeing two or more portfolios in the same

Fund Complex, identify the Fund Complex

and provide the number of portfolios

overseen as a director in the Fund Complex

rather than listing each portfolio separately.

(2) For each individual listed in column (1)

of the table required by paragraph (b)(1) of

this Item, except for any director or nominee

for election as director who is not or would

not be an ‘‘interested person’’ of the Fund

within the meaning of section 2(a)(19) of the

Investment Company Act of 1940 (15 U.S.C.

80a–2(a)(19)), describe any positions,

including as an officer, employee, director, or

general partner, held with affiliated persons

or principal underwriters of the Fund.

Instruction to paragraph (b)(2). When an

individual holds the same position(s) with

two or more registered investment companies

that are part of the same Fund Complex,

identify the Fund Complex and provide the

number of registered investment companies

for which the position(s) are held rather than

listing each registered investment company

separately.

(3) Describe briefly any arrangement or

understanding between any director,

nominee for election as director, Officer, or

person chosen to become an Officer, and any

other person(s) (naming the person(s))

pursuant to which he was or is to be selected

as a director, nominee, or Officer.

Instruction to paragraph (b)(3). Do not

include arrangements or understandings with

directors or Officers acting solely in their

capacities as such.

(4) Unless disclosed in the table required

by paragraph (b)(1) of this Item, describe any

positions, including as an officer, employee,

director, or general partner, held by any

director or nominee for election as director,

who is not or would not be an ‘‘interested

person’’ of the Fund within the meaning of

section 2(a)(19) of the Investment Company

Act of 1940 (15 U.S.C. 80a–2(a)(19)), or

Immediate Family Member of the director or

nominee, during the past five years, with:

(i) The Fund;

(ii) An investment company, or a person

that would be an investment company but for

the exclusions provided by sections 3(c)(1)

and 3(c)(7) of the Investment Company Act

of 1940 (15 U.S.C. 80a–3(c)(1) and (c)(7)),

having the same investment adviser,

principal underwriter, or Sponsoring

Insurance Company as the Fund or having an

investment adviser, principal underwriter, or

Sponsoring Insurance Company that directly

or indirectly controls, is controlled by, or is

under common control with an investment

adviser, principal underwriter, or Sponsoring

Insurance Company of the Fund;

(iii) An investment adviser, principal

underwriter, Sponsoring Insurance Company,

or affiliated person of the Fund; or

(iv) Any person directly or indirectly

controlling, controlled by, or under common

control with an investment adviser, principal

underwriter, or Sponsoring Insurance

Company of the Fund.

Instruction to paragraph (b)(4). When an

individual holds the same position(s) with

two or more portfolios that are part of the

same Fund Complex, identify the Fund

Complex and provide the number of

portfolios for which the position(s) are held

rather than listing each portfolio separately.

(5) For each director or nominee for

election as director, state the dollar range of

equity securities beneficially owned by the

director or nominee as required by the

following table:

(i) In the Fund; and

(ii) On an aggregate basis, in any registered

investment companies overseen or to be

overseen by the director or nominee within

the same Family of Investment Companies as

the Fund.

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3755

(1) (2) (3)

Name of

Director or

Nominee.

Dollar Range of

Equity Securities in the

Fund.

Aggregate Dollar Range of

Equity Securities in All

Funds Overseen or to be

Overseen by

Director or

Nominee in

Family of Investment

Companies

Instructions to paragraph (b)(5). 1.

Information should be provided as of the

most recent practicable date. Specify the

valuation date by footnote or otherwise.

2. Determine ‘‘beneficial ownership’’ in

accordance with rule 16a–1(a)(2) under the

Exchange Act (§ 240.16a–1(a)(2)).

3. If action is to be taken with respect to

more than one Fund, disclose in column (2)

the dollar range of equity securities

beneficially owned by a director or nominee

in each such Fund overseen or to be overseen

by the director or nominee.

4. In disclosing the dollar range of equity

securities beneficially owned by a director or

nominee in columns (2) and (3), use the

following ranges: none, $1–$10,000, $10,001–

$50,000, $50,001–$100,000, or over $100,000.

(6) For each director or nominee for

election as director who is not or would not

be an ‘‘interested person’’ of the Fund within

the meaning of section 2(a)(19) of the

Investment Company Act of 1940 (15 U.S.C.

80a–2(a)(19), and his Immediate Family

Members, furnish the information required

by the following table as to each class of

securities owned beneficially or of record in:

(i) An investment adviser, principal

underwriter, or Sponsoring Insurance

Company of the Fund; or

(ii) A person (other than a registered

investment company) directly or indirectly

controlling, controlled by, or under common

control with an investment adviser, principal

underwriter, or Sponsoring Insurance

Company of the Fund:

(1) (2) (3) (4) (5) (6)

Name of Director or

Nominee.

Name of Owners and

Relationships to Director or Nominee.

Company ................... Title of Class ............. Value of Securities .... Percent of Class

Instructions to paragraph (b)(6). 1.

Information should be provided as of the

most recent practicable date. Specify the

valuation date by footnote or otherwise.

2. An individual is a ‘‘beneficial owner’’ of

a security if he is a ‘‘beneficial owner’’ under

either rule 13d–3 or rule 16a–1(a)(2) under

the Exchange Act (§§ 240.13d–3 or 240.16a–

1(a)(2)).

3. Identify the company in which the

director, nominee, or Immediate Family

Member of the director or nominee owns

securities in column (3). When the company

is a person directly or indirectly controlling,

controlled by, or under common control with

an investment adviser, principal underwriter,

or Sponsoring Insurance Company, describe

the company’s relationship with the

investment adviser, principal underwriter, or

Sponsoring Insurance Company.

4. Provide the information required by

columns (5) and (6) on an aggregate basis for

each director (or nominee) and his Immediate

Family Members.

(7) Unless disclosed in response to

paragraph (b)(6) of this Item, describe any

direct or indirect interest, the value of which

exceeds $60,000, of each director or nominee

for election as director who is not or would

not be an ‘‘interested person’’ of the Fund

within the meaning of section 2(a)(19) of the

Investment Company Act of 1940 (15 U.S.C.

80a–2(a)(19)), or Immediate Family Member

of the director or nominee, during the past

five years, in:

(i) An investment adviser, principal

underwriter, or Sponsoring Insurance

Company of the Fund; or

(ii) A person (other than a registered

investment company) directly or indirectly

controlling, controlled by, or under common

control with an investment adviser, principal

underwriter, or Sponsoring Insurance

Company of the Fund.

Instructions to paragraph (b)(7). 1. A

director, nominee, or Immediate Family

Member has an interest in a company if he

is a party to a contract, arrangement, or

understanding with respect to any securities

of, or interest in, the company.

2. The interest of the director (or nominee)

and the interests of his Immediate Family

Members should be aggregated in

determining whether the value exceeds

$60,000.

(8) Describe briefly any material interest,

direct or indirect, of any director or nominee

for election as director who is not or would

not be an ‘‘interested person’’ of the Fund

within the meaning of section 2(a)(19) of the

Investment Company Act of 1940 (15 U.S.C.

80a–2(a)(19)), or Immediate Family Member

of the director or nominee, in any

transaction, or series of similar transactions,

since the beginning of the last two completed

fiscal years of the Fund, or in any currently

proposed transaction, or series of similar

transactions, in which the amount involved

exceeds $60,000 and to which any of the

following persons was or is to be a party:

(i) The Fund;

(ii) An Officer of the Fund;

(iii) An investment company, or a person

that would be an investment company but for

the exclusions provided by sections 3(c)(1)

and 3(c)(7) of the Investment Company Act

of 1940 (15 U.S.C. 80a–3(c)(1) and (c)(7)),

having the same investment adviser,

principal underwriter, or Sponsoring

Insurance Company as the Fund or having an

investment adviser, principal underwriter, or

Sponsoring Insurance Company that directly

or indirectly controls, is controlled by, or is

under common control with an investment

adviser, principal underwriter, or Sponsoring

Insurance Company of the Fund;

(iv) An Officer of an investment company,

or a person that would be an investment

company but for the exclusions provided by

sections 3(c)(1) and 3(c)(7) of the Investment

Company Act of 1940 (15 U.S.C. 80a–3(c)(1)

and (c)(7)), having the same investment

adviser, principal underwriter, or Sponsoring

Insurance Company as the Fund or having an

investment adviser, principal underwriter, or

Sponsoring Insurance Company that directly

or indirectly controls, is controlled by, or is

under common control with an investment

adviser, principal underwriter, or Sponsoring

Insurance Company of the Fund;

(v) An investment adviser, principal

underwriter, or Sponsoring Insurance

Company of the Fund;

(vi) An Officer of an investment adviser,

principal underwriter, or Sponsoring

Insurance Company of the Fund;

(vii) A person directly or indirectly

controlling, controlled by, or under common

control with an investment adviser, principal

underwriter, or Sponsoring Insurance

Company of the Fund; or

(viii) An Officer of a person directly or

indirectly controlling, controlled by, or under

common control with an investment adviser,

principal underwriter, or Sponsoring

Insurance Company of the Fund.

Instructions to paragraph (b)(8). 1. Include

the name of each director, nominee, or

Immediate Family Member whose interest in

any transaction or series of similar

transactions is described and the nature of

the circumstances by reason of which the

interest is required to be described.

2. State the nature of the interest, the

approximate dollar amount involved in the

transaction, and, where practicable, the

approximate dollar amount of the interest.

3. In computing the amount involved in

the transaction or series of similar

transactions, include all periodic payments

in the case of any lease or other agreement

providing for periodic payments.

4. Compute the amount of the interest of

any director, nominee, or Immediate Family

Member of the director or nominee without

regard to the amount of profit or loss

involved in the transaction(s).

5. As to any transaction involving the

purchase or sale of assets, state the cost of the

assets to the purchaser and, if acquired by the

seller within two years prior to the

transaction, the cost to the seller. Describe

the method used in determining the purchase

or sale price and the name of the person

making the determination.

6. If the proxy statement relates to multiple

portfolios of a series Fund with different

fiscal years, then, in determining the date

that is the beginning of the last two

completed fiscal years of the Fund, use the

3756 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

earliest date of any series covered by the

proxy statement.

7. Disclose indirect, as well as direct,

material interests in transactions. A person

who has a position or relationship with, or

interest in, a company that engages in a

transaction with one of the persons listed in

paragraphs (b)(8)(i) through (b)(8)(viii) of this

Item may have an indirect interest in the

transaction by reason of the position,

relationship, or interest. The interest in the

transaction, however, will not be deemed

‘‘material’’ within the meaning of paragraph

(b)(8) of this Item where the interest of the

director, nominee, or Immediate Family

Member arises solely from the holding of an

equity interest (including a limited

partnership interest, but excluding a general

partnership interest) or a creditor interest in

a company that is a party to the transaction

with one of the persons specified in

paragraphs (b)(8)(i) through (b)(8)(viii) of this

Item, and the transaction is not material to

the company.

8. The materiality of any interest is to be

determined on the basis of the significance of

the information to investors in light of all the

circumstances of the particular case. The

importance of the interest to the person

having the interest, the relationship of the

parties to the transaction with each other,

and the amount involved in the transaction

are among the factors to be considered in

determining the significance of the

information to investors.

9. No information need be given as to any

transaction where the interest of the director,

nominee, or Immediate Family Member

arises solely from the ownership of securities

of a person specified in paragraphs (b)(8)(i)

through (b)(8)(viii) of this Item and the

director, nominee, or Immediate Family

Member receives no extra or special benefit

not shared on a pro rata basis by all holders

of the class of securities.

10. Transactions include loans, lines of

credit, and other indebtedness. For

indebtedness, indicate the largest aggregate

amount of indebtedness outstanding at any

time during the period, the nature of the

indebtedness and the transaction in which it

was incurred, the amount outstanding as of

the latest practicable date, and the rate of

interest paid or charged.

11. No information need be given as to any

routine, retail transaction. For example, the

Fund need not disclose that a director has a

credit card, bank or brokerage account,

residential mortgage, or insurance policy

with a person specified in paragraphs (b)(8)(i)

through (b)(8)(viii) of this Item unless the

director is accorded special treatment.

(9) Describe briefly any direct or indirect

relationship, in which the amount involved

exceeds $60,000, of any director or nominee

for election as director who is not or would

not be an ‘‘interested person’’ of the Fund

within the meaning of section 2(a)(19) of the

Investment Company Act of 1940 (15 U.S.C.

80a–2(a)(19)), or Immediate Family Member

of the director or nominee, that exists, or has

existed at any time since the beginning of the

last two completed fiscal years of the Fund,

or is currently proposed, with any of the

persons specified in paragraphs (b)(8)(i)

through (b)(8)(viii) of this Item. Relationships

include:

(i) Payments for property or services to or

from any person specified in paragraphs

(b)(8)(i) through (b)(8)(viii) of this Item;

(ii) Provision of legal services to any

person specified in paragraphs (b)(8)(i)

through (b)(8)(viii) of this Item;

(iii) Provision of investment banking

services to any person specified in

paragraphs (b)(8)(i) through (b)(8)(viii) of this

Item, other than as a participating

underwriter in a syndicate; and

(iv) Any consulting or other relationship

that is substantially similar in nature and

scope to the relationships listed in

paragraphs (b)(9)(i) through (b)(9)(iii) of this

Item.

Instructions to paragraph (b)(9). 1. Include

the name of each director, nominee, or

Immediate Family Member whose

relationship is described and the nature of

the circumstances by reason of which the

relationship is required to be described.

2. State the nature of the relationship and

the amount of business conducted between

the director, nominee, or Immediate Family

Member and the person specified in

paragraphs (b)(8)(i) through (b)(8)(viii) of this

Item as a result of the relationship since the

beginning of the last two completed fiscal

years of the Fund or proposed to be done

during the Fund’s current fiscal year.

3. In computing the amount involved in a

relationship, include all periodic payments

in the case of any agreement providing for

periodic payments.

4. If the proxy statement relates to multiple

portfolios of a series Fund with different

fiscal years, then, in determining the date

that is the beginning of the last two

completed fiscal years of the Fund, use the

earliest date of any series covered by the

proxy statement.

5. Disclose indirect, as well as direct,

relationships. A person who has a position or

relationship with, or interest in, a company

that has a relationship with one of the

persons listed in paragraphs (b)(8)(i) through

(b)(8)(viii) of this Item may have an indirect

relationship by reason of the position,

relationship, or interest.

6. In determining whether the amount

involved in a relationship exceeds $60,000,

amounts involved in a relationship of the

director (or nominee) should be aggregated

with those of his Immediate Family

Members.

7. In the case of an indirect interest,

identify the company with which a person

specified in paragraphs (b)(8)(i) through

(b)(8)(viii) of this Item has a relationship; the

name of the director, nominee, or Immediate

Family Member affiliated with the company

and the nature of the affiliation; and the

amount of business conducted between the

company and the person specified in

paragraphs (b)(8)(i) through (b)(8)(viii) of this

Item since the beginning of the last two

completed fiscal years of the Fund or

proposed to be done during the Fund’s

current fiscal year.

8. In calculating payments for property and

services for purposes of paragraph (b)(9)(i) of

this Item, the following may be excluded:

A. Payments where the transaction

involves the rendering of services as a

common contract carrier, or public utility, at

rates or charges fixed in conformity with law

or governmental authority; or

B. Payments that arise solely from the

ownership of securities of a person specified

in paragraphs (b)(8)(i) through (b)(8)(viii) of

this Item and no extra or special benefit not

shared on a pro rata basis by all holders of

the class of securities is received.

9. No information need be given as to any

routine, retail relationship. For example, the

Fund need not disclose that a director has a

credit card, bank or brokerage account,

residential mortgage, or insurance policy

with a person specified in paragraphs (b)(8)(i)

through (b)(8)(viii) of this Item unless the

director is accorded special treatment.

(10) If an Officer of an investment adviser,

principal underwriter, or Sponsoring

Insurance Company of the Fund, or an

Officer of a person directly or indirectly

controlling, controlled by, or under common

control with an investment adviser, principal

underwriter, or Sponsoring Insurance

Company of the Fund, serves, or has served

since the beginning of the last two completed

fiscal years of the Fund, on the board of

directors of a company where a director of

the Fund or nominee for election as director

who is not or would not be an ‘‘interested

person’’ of the Fund within the meaning of

section 2(a)(19) of the Investment Company

Act of 1940 (15 U.S.C. 80a–2(a)(19)), or

Immediate Family Member of the director or

nominee, is, or was since the beginning of the

last two completed fiscal years of the Fund,

an Officer, identify:

(i) The company;

(ii) The individual who serves or has

served as a director of the company and the

period of service as director;

(iii)The investment adviser, principal

underwriter, or Sponsoring Insurance

Company or person controlling, controlled

by, or under common control with the

investment adviser, principal underwriter, or

Sponsoring Insurance Company where the

individual named in paragraph (b)(10)(ii) of

this Item holds or held office and the office

held; and

(iv) The director of the Fund, nominee for

election as director, or Immediate Family

Member who is or was an Officer of the

company; the office held; and the period of

holding the office.

Instruction to paragraph (b)(10). If the

proxy statement relates to multiple portfolios

of a series Fund with different fiscal years,

then, in determining the date that is the

beginning of the last two completed fiscal

years of the Fund, use the earliest date of any

series covered by the proxy statement.

(11) Provide in tabular form, to the extent

practicable, the information required by

Items 401(f) and (g), 404(a) and (c), and 405

of Regulation S–K (§§ 229.401(f) and (g),

229.404(a) and (c), and 229.405 of this

chapter).

Instruction to paragraph (b)(11).

Information provided under paragraph (b)(8)

of this Item 22 is deemed to satisfy the

requirements of Items 404(a) and (c) of

Regulation S–K for information about

directors, nominees for election as directors,

and Immediate Family Members of directors

and nominees, and need not be provided

under this paragraph (b)(11).

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3757

(12) Describe briefly any material pending

legal proceedings, other than ordinary

routine litigation incidental to the Fund’s

business, to which any director or nominee

for director or affiliated person of such

director or nominee is a party adverse to the

Fund or any of its affiliated persons or has

a material interest adverse to the Fund or any

of its affiliated persons. Include the name of

the court where the case is pending, the date

instituted, the principal parties, a description

of the factual basis alleged to underlie the

proceeding, and the relief sought.

(13) For all directors, and for each of the

three highest-paid Officers that have

aggregate compensation from the Fund for

the most recently completed fiscal year in

excess of $60,000 (‘‘Compensated Persons’’):

(i) Furnish the information required by the

following table for the last fiscal year:

COMPENSATION TABLE

(1) (2) (3) (4) (5)

Name of Person, Position.Aggregate Compensation

From Fund.

Pension or Retirement Benefits Accrued as Part of

Fund Expenses.

Estimated Annual Benefits

Upon Retirement.

Total Compensation From

Fund and Complex Paid

to Directors

Instructions to paragraph (b)(13)(i). 1. For

column (1), indicate, if necessary, the

capacity in which the remuneration is

received. For Compensated Persons that are

directors of the Fund, compensation is

amounts received for service as a director.

2. If the Fund has not completed its first

full year since its organization, furnish the

information for the current fiscal year,

estimating future payments that would be

made pursuant to an existing agreement or

understanding. Disclose in a footnote to the

Compensation Table the period for which the

information is furnished.

3. Include in column (2) amounts deferred

at the election of the Compensated Person,

whether pursuant to a plan established under

Section 401(k) of the Internal Revenue Code

(26 U.S.C. 401(k)) or otherwise, for the fiscal

year in which earned. Disclose in a footnote

to the Compensation Table the total amount

of deferred compensation (including interest)

payable to or accrued for any Compensated

Person.

4. Include in columns (3) and (4) all

pension or retirement benefits proposed to be

paid under any existing plan in the event of

retirement at normal retirement date, directly

or indirectly, by the Fund or any of its

Subsidiaries, or by other companies in the

Fund Complex. Omit column (4) where

retirement benefits are not determinable.

5. For any defined benefit or actuarial plan

under which benefits are determined

primarily by final compensation (or average

final compensation) and years of service,

provide the information required in column

(4) in a separate table showing estimated

annual benefits payable upon retirement

(including amounts attributable to any

defined benefit supplementary or excess

pension award plans) in specified

compensation and years of service

classifications. Also provide the estimated

credited years of service for each

Compensated Person.

6. Include in column (5) only aggregate

compensation paid to a director for service

on the board and other boards of investment

companies in a Fund Complex specifying the

number of such other investment companies.

(ii) Describe briefly the material provisions

of any pension, retirement, or other plan or

any arrangement other than fee arrangements

disclosed in paragraph (b)(13)(i) of this Item

pursuant to which Compensated Persons are

or may be compensated for any services

provided, including amounts paid, if any, to

the Compensated Person under any such

arrangements during the most recently

completed fiscal year. Specifically include

the criteria used to determine amounts

payable under any plan, the length of service

or vesting period required by the plan, the

retirement age or other event that gives rise

to payments under the plan, and whether the

payment of benefits is secured or funded by

the Fund.

(iii) With respect to each Compensated

Person, business development companies

must include the information required by

Items 402(b)(2)(iv) and 402(c) of Regulation

S–K (§§ 229.402(b)(2)(iv) and 229.402(c) of

this chapter).

(14) Identify the standing committees of

the Fund’s board of directors, and provide

the following information about each

committee:

(i) A concise statement of the functions of

the committee;

(ii) The members of the committee;

(iii) The number of committee meetings

held during the last fiscal year; and

(iv) If the committee is a nominating or

similar committee, state whether the

committee will consider nominees

recommended by security holders and, if so,

describe the procedures to be followed by

security holders in submitting

recommendations.

* * * * *

PART 270—RULES AND

REGULATIONS, INVESTMENT

COMPANY ACT OF 1940

3. The authority citation for Part 270

is amended by adding the following

citations to read as follows:

Authority: 15 U.S.C. 80a–1 et seq., 80a–

34(d), 80a–37, 80a–39 unless otherwise

noted;

* * * * *

Section 270.10e–1 is also issued under 15

U.S.C. 80a–10(e);

Section 270.17a–8 is also issued under 15

U.S.C. 80a–6(c) and 80a–37(a);

Section 270.17d–1 is also issued under 15

U.S.C. 80a–6(c), 80a–17(d), and 80a–37(a);

Section 270.17e–1 is also issued under 15

U.S.C. 80a–6(c), 80a–30(a), and 80a–37(a);

Section 270.17g–1 is also issued under 15

U.S.C. 80a–6(c), 80a–17(d), 80a–17(g), and

80a–37(a);

Section 270.30e–1 is also issued under 15

U.S.C. 77f, 77g, 77h, 77j, 77s, 78l, 78m, 78n,

78o(d), 78w(a), 80a–8, 80a–29, and 80a–37;

Section 270.31a–2 is also issued under 15

U.S.C. 80a–30.

* * * * *

§§ 270.17a–8, 270.17d–1, 270.17e–1

[Amended]

4. The authority citations following

§§ 270.17a–8, 270.17d–1, 270.17e–1,

270.17g–1, 270.30d–1, and 270.31a–2

are removed.

5. Section 270.0–1 is amended by

adding paragraphs (a)(5) and (a)(6) to

read as follows:

§ 270.0–1 Definition of terms used in this

part.

(a) * * *

(5) The term administrator means any

person who provides significant

administrative or business affairs

management services to an investment

company.

(6)(i) A person is an independent legal

counsel with respect to the directors

who are not interested persons of an

investment company (‘‘disinterested

directors’’) if:

(A) A majority of the disinterested

directors reasonably determine in the

exercise of their judgment (and record

the basis for that determination in the

minutes of their meeting) that any

representation by the person of the

company’s investment adviser,

principal underwriter, administrator

(‘‘management organizations’’), or any of

their control persons, since the

beginning of the fund’s last two

completed fiscal years, is or was

sufficiently limited that it is unlikely to

adversely affect the professional

judgment of the person in providing

legal representation to the disinterested

directors; and

(B) The disinterested directors have

obtained an undertaking from such

person to provide them with

information necessary to make their

determination and to update promptly

that information when the person begins

to represent, or materially increases his

representation of, a management

organization or control person.

3758 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

(ii) The disinterested directors are

entitled to rely on the information

obtained from the person, unless they

know or have reason to believe that the

information is materially false or

incomplete. The disinterested directors

must re-evaluate their determination no

less frequently than annually (and

record the basis accordingly), except as

provided in paragraph (iii) of this

section.

(iii)After the disinterested directors

obtain information that the person has

begun to represent, or has materially

increased his representation of, a

management organization (or any of its

control persons), the person may

continue to be an independent legal

counsel, for purposes of paragraph

(a)(6)(i) of this section, for no longer

than three months unless during that

period the disinterested directors make

a new determination under that

paragraph.

(iv) For purposes of paragraphs

(a)(6)(i)–(iii) of this section:

(A) The term person has the same

meaning as in section 2(a)(28) of the Act

(15 U.S.C. 80a–2(a)(28)) and, in

addition, includes a partner, comember, or employee of any person;

and

(B) The term control person means

any person (other than an investment

company) directly or indirectly

controlling, controlled by, or under

common control with any of the

investment company’s management

organizations.

* * * * *

§ 270.2a19–1 [Removed and reserved]

6. Section 270.2a19–1 is removed and

reserved.

7. Section 270.2a19–3 is added to read

as follows:

§ 270.2a19–3 Certain investment company

directors not considered interested persons

because of ownership of index fund

securities.

If a director of a registered investment

company (‘‘Fund’’) owns shares of a

registered investment company

(including the Fund) with an

investment objective to replicate the

performance of one or more broad-based

securities indices (‘‘Index Fund’’),

ownership of the Index Fund shares will

not cause the director to be considered

an ‘‘interested person’’ of the Fund or of

the Fund’s investment adviser or

principal underwriter (as defined by

section 2(a)(19)(A)(iii) and (B)(iii) of the

Act (15 U.S.C. 80a–2(a)(19)(A)(iii) and

(B)(iii)).

8. Section 270.10e–1 is added to read

as follows:

§ 270.10e–1 Death, disqualification, or

bona fide resignation of directors.

If a registered investment company,

by reason of the death, disqualification,

or bona fide resignation of any director,

does not meet any requirement of the

Act or any rule or regulation thereunder

regarding the composition of the

company’s board of directors, the

operation of the relevant subsection of

the Act, rule, or regulation will be

suspended as to the company:

(a) For 90 days if the vacancy may be

filled by action of the board of directors;

or

(b) For 150 days if a vote of

stockholders is required to fill the

vacancy.

9. Section 270.10f–3 is amended by

redesignating paragraph (b)(11) as

paragraph (b)(12), and adding new

paragraph (b)(11) to read as follows:

§ 270.10f–3 Exemption for the acquisition

of securities during the existence of an

underwriting or selling syndicate.

* * * * *

(b) * * *

(11) Board Composition, Selection,

and Representation:

(i) A majority of the directors of the

investment company are not interested

persons of the company, and those

directors select and nominate any other

disinterested directors of the company;

and

(ii) Any person who acts as legal

counsel for the disinterested directors of

the company is an independent legal

counsel.

* * * * *

10. Section 270.12b–1 is amended by

revising paragraph (c) to read as follows:

§ 270.12b–1 Distribution of shares by

registered open-end management

investment company.

* * * * *

(c) A registered open-end

management investment company may

rely on the provisions of paragraph (b)

of this section only if:

(1) A majority of the directors of the

company are not interested persons of

the company, and those directors select

and nominate any other disinterested

directors of the company; and

(2) Any person who acts as legal

counsel for the disinterested directors of

the company is an independent legal

counsel;

* * * * *

11. Section 270.15a–4 is amended by:

a. Removing the word ‘‘and’’ at the

end of paragraph (b)(2)(v);

b. Removing the period at the end of

paragraph (b)(2)(vi)(C)(2) and adding in

its place ‘‘; and’’; and

c. Adding paragraph (b)(2)(vii) to read

as follows:

§ 270.15a–4 Temporary exemption for

certain investment advisers.

* * * * *

(b) * * *

(2) * * *

(vii)(A) A majority of the directors of

the investment company are not

interested persons of the company, and

those directors select and nominate any

other disinterested directors of the

company; and

(B) Any person who acts as legal

counsel for the disinterested directors of

the company is an independent legal

counsel.

12. Section 270.17a–7 is amended by:

a. Removing the ‘‘and’’ at the end of

paragraph (e)(3);

b. Redesignating paragraph (f) as

paragraph (g); and

c. Adding new paragraph (f) to read as

follows:

§ 270.17a–7 Exemption of certain

purchase or sale transactions between an

investment company and certain affiliated

persons thereof.

* * * * *

(f)(1) A majority of the directors of the

investment company are not interested

persons of the company, and those

directors select and nominate any other

disinterested directors of the company;

and

(2) Any person who acts as legal

counsel for the disinterested directors of

the company is an independent legal

counsel; and

* * * * *

13. Section 270.17a–8 is amended by:

a. Removing the ‘‘, and’’ at the end of

paragraph (a)(2) and in its place adding

a semi-colon;

b. Removing the period at the end of

paragraph (b) and adding in its place ‘‘;

and’’; and

c. Adding new paragraph (c) to read

as follows:

§ 270.17a–8 Mergers of certain affiliated

investment companies.

* * * * *

(c)(1) A majority of the directors of the

investment company are not interested

persons of the company, and those

directors select and nominate any other

disinterested directors of the company;

and

(2) Any person who acts as legal

counsel for the disinterested directors of

the company is an independent legal

counsel.

14. Section 270.17d–1 is amended by:

a. Removing the word ‘‘and’’ at the

end of paragraph (d)(7)(ii);

b. Redesignating paragraph (d)(7)(iii)

as paragraph (d)(7)(iv);

c. Removing the period at the end of

newly designated paragraph (d)(7)(iv)

and adding in its place ‘‘; and’’; and

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3759

d. Adding new paragraphs (d)(7)(iii)

and (d)(7)(v) to read as follows:

§ 270.17d–1 Applications regarding joint

enterprises or arrangements and certain

profit-sharing plans.

* * * * *

(d) * * *

(7) * * *

(iii) The joint liability insurance

policy does not exclude coverage for

bona fide claims made against any

director who is not an interested person

of the investment company, or against

the investment company if it is a codefendant in the claim with the

disinterested director, by another person

insured under the joint liability

insurance policy;

* * * * *

(v)(A) A majority of the directors of

the investment company are not

interested persons of the company, and

those directors select and nominate any

other disinterested directors of the

company; and

(B) Any person who acts as legal

counsel for the disinterested directors of

the company is an independent legal

counsel.

* * * * *

15. Section 270.17e–1 is amended by:

a. Removing the word ‘‘and’’ at the

end of paragraph (b)(3);

b. Redesignating paragraph (c) as

paragraph (d); and

c. Adding new paragraph (c) to read

as follows:

§ 270.17e–1 Brokerage transactions on a

securities exchange.

* * * * *

(c)(1) A majority of the directors of the

investment company are not interested

persons of the company, and those

directors select and nominate any other

disinterested directors of the company;

and

(2) Any person who acts as legal

counsel for the disinterested directors of

the company is an independent legal

counsel; and

* * * * *

16. Section 270.17g–1 is amended by

revising paragraph (j) to read as follows:

§ 270.17g–1 Bonding of officers and

employees of registered management

investment companies.

* * * * *

(j) Any joint insured bond provided

and maintained by a registered

management investment company and

one or more other parties shall be a

transaction exempt from the provisions

of section 17(d) of the Act (15 U.S.C.

80a–17(d)) and the rules thereunder, if:

(1) The terms and provisions of the

bond comply with the provisions of this

section;

(2) The terms and provisions of any

agreement required by paragraph (f) of

this section comply with the provisions

of that paragraph; and

(3)(i) A majority of the directors of the

investment company are not interested

persons of the company, and those

directors select and nominate any other

disinterested directors of the company;

and

(ii) Any person who acts as legal

counsel for the disinterested directors of

the company is an independent legal

counsel.

* * * * *

17. Section 270.18f–3 is amended by

redesignating paragraph (e) as paragraph

(f), and adding new paragraph (e) to

read as follows:

§ 270.18f–3 Multiple class companies.

* * * * *

(e)(1) A majority of the directors of the

investment company are not interested

persons of the company, and those

directors select and nominate any other

disinterested directors of the company;

and

(2) Any person who acts as legal

counsel for the disinterested directors of

the company is an independent legal

counsel.

* * * * *

18. Section 270.23c–3 is amended by

revising paragraph (b)(8) to read as

follows:

§ 270.23c–3 Repurchase offers by closedend companies.

* * * * *

(b) * * *

(8)(i) A majority of the directors of the

investment company are not interested

persons of the company, and those

directors select and nominate any other

disinterested directors of the company;

and

(ii) Any person who acts as legal

counsel for the disinterested directors of

the company is an independent legal

counsel.

* * * * *

§ 270.30d–1 [Redesignated as § 270.30e–1]

19. a. Redesignate § 270.30d–1 as

§ 270.30e–1;

b. In newly designated § 270.30e–1, in

paragraph (a), revise ‘‘financial

statements’’ to read ‘‘information’’; and

c. Revise paragraph (d) to read as

follows:

§ 270.30e–1 Reports to stockholders of

management companies.

* * * * *

(d) An open-end company may

transmit a copy of its currently effective

prospectus or Statement of Additional

Information, or both, under the

Securities Act, in place of any report

required to be transmitted to

shareholders by this section, provided

that the prospectus or Statement of

Additional Information, or both, include

all the information that would otherwise

be required to be contained in the report

by this section. Such prospectus or

Statement of Additional Information, or

both, shall be transmitted within 60

days after the close of the period for

which the report is being made.

* * * * *

§ 270.30d–2 [Redesignated as § 270.30e–2]

20. Redesignate § 270.30d–2 as

§ 270.30e–2, and in newly designated

§ 270.30e–2:

a. Revise ‘‘§ 270.30d–1’’ in the first

and second sentences of paragraph (a) to

read ‘‘§ 270.30e–1’’; and

b. Revise ‘‘§ 270.30d–1(f)’’ in

paragraph (b) to read ‘‘§ 270.30e-1(f)’’.

21. Section 270.31a–2 is amended by

removing the period at end of paragraph

(a)(3) and in its place adding a semicolon, and adding paragraphs (a)(4) and

(a)(5) to read as follows:

§ 270.31a–2 Records to be preserved by

registered investment companies, certain

majority-owned subsidiaries thereof, and

other persons having transactions with

registered investment companies.

(a) * * *

(4) Preserve for a period not less than

six years, the first two years in an easily

accessible place, any record of the

initial determination that a director is

not an interested person of the

investment company, and each

subsequent determination that the

director is not an interested person of

the investment company. These records

must include any questionnaire and any

other document used to determine that

a director is not an interested person of

the company; and

(5) Preserve for a period not less than

six years, the first two years in an easily

accessible place, any materials used by

the disinterested directors of an

investment company to determine that a

person who is acting as legal counsel to

those directors is an independent legal

counsel.

* * * * *

22. Section 270.32a–4 is added to read

as follows:

§ 270.32a–4 Independent audit

committees.

A registered management investment

company or a registered face-amount

certificate company is exempt from the

requirement of section 32(a)(2) of the

Act (15 U.S.C. 80a–32(a)(2)) that the

selection of the company’s independent

public accountant be submitted for

3760 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

ratification or rejection at the next

succeeding annual meeting of

shareholders, if:

(a) The company’s board of directors

has established a committee, composed

solely of directors who are not

interested persons of the company, that

has responsibility for overseeing the

fund’s accounting and auditing

processes (‘‘audit committee’’);

(b) The company’s board of directors

has adopted a charter for the audit

committee setting forth the committee’s

structure, duties, powers, and methods

of operation or set forth such provisions

in the fund’s charter or bylaws; and

(c) The company maintains and

preserves permanently in an easily

accessible place a copy of the audit

committee’s charter and any

modification to the charter.

PART 239—FORMS PRESCRIBED

UNDER THE SECURITIES ACT OF 1933

23. The authority citation for part 239

continues to read, in part, as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,

77z-2, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78u–

5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m,

79n, 79q, 79t, 80a–8, 80a–24, 80a–29, 80a–30,

and 80a–37, unless otherwise noted.

* * * * *

PART 274—FORMS PRESCRIBED

UNDER THE INVESTMENT COMPANY

ACT OF 1940

24. The authority citation for part 274

continues to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s,

78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24,

and 80a–29, unless otherwise noted.

Note: The text of Form N–1A does not and

these amendments will not appear in the

Code of Federal Regulations.

25. Form N–1A (referenced in

§§ 239.15A and 274.11A), is amended

by:

a. In Item 13 by adding Instructions 1

and 2 before paragraph (a).

b. In Item 13 by removing paragraphs

(a), (b), and (c) and adding paragraphs

(a) and (b) in their place.

c. In Item 13 by redesignating

paragraphs (d) and (e) as paragraphs (c)

and (d).

d. In Item 13 by removing ‘‘executive’’

from the first sentence of newly

redesignated paragraph (c).

e. In Item 22 by adding paragraphs

(b)(5) and (b)(6).

These additions and revisions read as

follows:

Form N–1A

* * * * *

Item 13. Management of the Fund

Instructions

1. For purposes of this Item 13, the terms

below have the following meanings:

(a) The term ‘‘family of investment

companies’’ means any two or more

registered investment companies that:

(1) Share the same investment adviser or

principal underwriter; and

(2) Hold themselves out to investors as

related companies for purposes of investment

and investor services.

(b) The term ‘‘fund complex’’ means two or

more registered investment companies that:

(1) Hold themselves out to investors as

related companies for purposes of investment

and investor services; or

(2) Have a common investment adviser or

have an investment adviser that is an

affiliated person of the investment adviser of

any of the other registered investment

companies.

(c) The term ‘‘immediate family member’’

means a person’s spouse; child residing in

the person’s household (including step and

adoptive children); and any dependent of the

person, as defined in section 152 of the

Internal Revenue Code (26 U.S.C. 152).

(d) The term ‘‘officer’’ means the president,

vice-president, secretary, treasurer,

controller, or any other officer who performs

policy-making functions.

2. When providing information about

directors, furnish information for directors

who are interested persons of the Fund

separately from the information for directors

who are not interested persons of the Fund.

For example, when furnishing information in

a table, you should provide separate tables

(or separate sections of a single table) for

directors who are interested persons and for

directors who are not interested persons.

When furnishing information in narrative

form, indicate by heading or otherwise the

directors who are interested persons and the

directors who are not interested persons.

(a) Management Information.

(1) Provide the information required by the

following table for each director and officer

of the Fund, and, if the Fund has an advisory

board, member of the board. Explain in a

footnote to the table any family relationship

between the persons listed.

(1) (2) (3) (4) (5) (6)

Name, address, and

age.

Position(s) held with

fund.

Term of office and

length of time

served.

Principal occupation(s) during past

5 years.

Number of portfolios

in fund complex

overseen by director.

Other directorships

held by director.

Instructions. 1. For purposes of this

paragraph, the term ‘‘family relationship’’

means any relationship by blood, marriage,

or adoption, not more remote than first

cousin.

2. For each director who is an interested

person of the Fund, describe, in a footnote or

otherwise, the relationship, events, or

transactions by reason of which the director

is an interested person.

3. State the principal business of any

company listed under column (4) unless the

principal business is implicit in its name.

4. Indicate in column (6) directorships not

included in column (5) that are held by a

director in any company with a class of

securities registered pursuant to section 12 of

the Securities Exchange Act (15 U.S.C. 78l)

or subject to the requirements of section

15(d) of the Securities Exchange Act (15

U.S.C. 78o(d)) or any company registered as

an investment company under the

Investment Company Act, and name the

companies in which the directorships are

held. Where the other directorships include

directorships overseeing two or more

portfolios in the same fund complex, identify

the fund complex and provide the number of

portfolios overseen as a director in the fund

complex rather than listing each portfolio

separately.

(2) For each individual listed in column (1)

of the table required by paragraph (a)(1) of

this Item 13, except for any director who is

not an interested person of the Fund,

describe any positions, including as an

officer, employee, director, or general

partner, held with affiliated persons or

principal underwriters of the Fund.

Instruction. When an individual holds the

same position(s) with two or more registered

investment companies that are part of the

same fund complex, identify the fund

complex and provide the number of

registered investment companies for which

the position(s) are held rather than listing

each registered investment company

separately.

(3) Describe briefly any arrangement or

understanding between any director or

officer and any other person(s) (naming the

person(s)) pursuant to which he was selected

as a director or officer.

Instruction. Do not include arrangements

or understandings with directors or officers

acting solely in their capacities as such.

(b) Board of Directors.

(1) Briefly describe the responsibilities of

the board of directors with respect to the

Fund’s management.

Instruction. A Fund may respond to this

paragraph by providing a general statement

as to the responsibilities of the board of

directors with respect to the Fund’s

management under the applicable laws of the

state or other jurisdiction in which the Fund

is organized.

(2) Identify the standing committees of the

Fund’s board of directors, and provide the

following information about each committee:

(i) A concise statement of the functions of

the committee;

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3761

(ii) The members of the committee;

(iii)The number of committee meetings

held during the last fiscal year; and

(iv) If the committee is a nominating or

similar committee, state whether the

committee will consider nominees

recommended by security holders and, if so,

describe the procedures to be followed by

security holders in submitting

recommendations.

(3) Unless disclosed in the table required

by paragraph (a)(1) of this Item 13, describe

any positions, including as an officer,

employee, director, or general partner, held

by any director who is not an interested

person of the Fund, or immediate family

member of the director, during the two most

recently completed calendar years with:

(i) The Fund;

(ii) An investment company, or a person

that would be an investment company but for

the exclusions provided by sections 3(c)(1)

and 3(c)(7) (15 U.S.C. 80a–3(c)(1) and (c)(7)),

having the same investment adviser or

principal underwriter as the Fund or having

an investment adviser or principal

underwriter that directly or indirectly

controls, is controlled by, or is under

common control with an investment adviser

or principal underwriter of the Fund;

(iii) An investment adviser, principal

underwriter, or affiliated person of the Fund;

or

(iv) Any person directly or indirectly

controlling, controlled by, or under common

control with an investment adviser or

principal underwriter of the Fund.

Instruction. When an individual holds the

same position(s) with two or more portfolios

that are part of the same fund complex,

identify the fund complex and provide the

number of portfolios for which the

position(s) are held rather than listing each

portfolio separately.

(4) For each director, state the dollar range

of equity securities beneficially owned by the

director as required by the following table:

(i) In the Fund; and

(ii) On an aggregate basis, in any registered

investment companies overseen by the

director within the same family of

investment companies as the Fund.

(1) (2) (3)

Name of director Dollar range of equity securities in the fund ............................. Aggregate dollar range of equity securities in all registered investment companies overseen by director in family of investment companies.

Instructions. 1. Information should be

provided as of the end of the most recently

completed calendar year. Specify the

valuation date by footnote or otherwise.

2. Determine ‘‘beneficial ownership’’ in

accordance with rule 16a–1(a)(2) under the

Exchange Act (17 C.F.R. 240.16a–1(a)(2)).

3. If the SAI covers more than one Fund

or Series, disclose in column (2) the dollar

range of equity securities beneficially owned

by a director in each Fund or Series overseen

by the director.

4. In disclosing the dollar range of equity

securities beneficially owned by a director in

columns (2) and (3), use the following ranges:

none, $1–$10,000, $10,001–$50,000,

$50,001–$100,000, or over $100,000.

(5) For each director who is not an

interested person of the Fund, and his

immediate family members, furnish the

information required by the following table

as to each class of securities owned

beneficially or of record in:

(i) An investment adviser or principal

underwriter of the Fund; or

(ii) A person (other than a registered

investment company) directly or indirectly

controlling, controlled by, or under common

control with an investment adviser or

principal underwriter of the Fund:

(1) (2) (3) (4) (5) (6)

Name of Director ....... Name of Owners and

Relationships to Director.

Company ................... Title of Class ............. Value of Securities .... Percent of Class

Instructions. 1. Information should be

provided as of the end of the most recently

completed calendar year. Specify the

valuation date by footnote or otherwise.

2. An individual is a ‘‘beneficial owner’’ of

a security if he is a ‘‘beneficial owner’’ under

either rule 13d–3 or rule 16a–1(a)(2) under

the Exchange Act (17 C.F.R. 240.13d–3 or

240.16a–1(a)(2)).

3. Identify the company in which the

director or immediate family member of the

director owns securities in column (3). When

the company is a person directly or indirectly

controlling, controlled by, or under common

control with an investment adviser or

principal underwriter, describe the

company’s relationship with the investment

adviser or principal underwriter.

4. Provide the information required by

columns (5) and (6) on an aggregate basis for

each director and his immediate family

members.

(6) Unless disclosed in response to

paragraph (b)(5) of this Item 13, describe any

direct or indirect interest, the value of which

exceeds $60,000, of each director who is not

an interested person of the Fund, or

immediate family member of the director,

during the two most recently completed

calendar years, in:

(i) An investment adviser or principal

underwriter of the Fund; or

(ii) A person (other than a registered

investment company) directly or indirectly

controlling, controlled by, or under common

control with an investment adviser or

principal underwriter of the Fund.

Instructions. 1. A director or immediate

family member has an interest in a company

if he is a party to a contract, arrangement, or

understanding with respect to any securities

of, or interest in, the company.

2. The interest of the director and the

interests of his immediate family members

should be aggregated in determining whether

the value exceeds $60,000.

(7) Describe briefly any material interest,

direct or indirect, of any director who is not

an interested person of the Fund, or

immediate family member of the director, in

any transaction, or series of similar

transactions, during the two most recently

completed calendar years, in which the

amount involved exceeds $60,000 and to

which any of the following persons was a

party:

(i) The Fund;

(ii) An officer of the Fund;

(iii) An investment company, or a person

that would be an investment company but for

the exclusions provided by sections 3(c)(1)

and 3(c)(7) (15 U.S.C. 80a–3(c)(1) and (c)(7)),

having the same investment adviser or

principal underwriter as the Fund or having

an investment adviser or principal

underwriter that directly or indirectly

controls, is controlled by, or is under

common control with an investment adviser

or principal underwriter of the Fund;

(iv) An officer of an investment company,

or a person that would be an investment

company but for the exclusions provided by

sections 3(c)(1) and 3(c)(7) (15 U.S.C. 80a–

3(c)(1) and (c)(7)), having the same

investment adviser or principal underwriter

as the Fund or having an investment adviser

or principal underwriter that directly or

indirectly controls, is controlled by, or is

under common control with an investment

adviser or principal underwriter of the Fund;

(v) An investment adviser or principal

underwriter of the Fund;

(vi) An officer of an investment adviser or

principal underwriter of the Fund;

(vii) A person directly or indirectly

controlling, controlled by, or under common

control with an investment adviser or

principal underwriter of the Fund; or

(viii) An officer of a person directly or

indirectly controlling, controlled by, or under

common control with an investment adviser

or principal underwriter of the Fund.

3762 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

Instructions. 1. Include the name of each

director or immediate family member whose

interest in any transaction or series of similar

transactions is described and the nature of

the circumstances by reason of which the

interest is required to be described.

2. State the nature of the interest, the

approximate dollar amount involved in the

transaction, and, where practicable, the

approximate dollar amount of the interest.

3. In computing the amount involved in

the transaction or series of similar

transactions, include all periodic payments

in the case of any lease or other agreement

providing for periodic payments.

4. Compute the amount of the interest of

any director or immediate family member of

the director without regard to the amount of

profit or loss involved in the transaction(s).

5. As to any transaction involving the

purchase or sale of assets, state the cost of the

assets to the purchaser and, if acquired by the

seller within two years prior to the

transaction, the cost to the seller. Describe

the method used in determining the purchase

or sale price and the name of the person

making the determination.

6. Disclose indirect, as well as direct,

material interests in transactions. A person

who has a position or relationship with, or

interest in, a company that engages in a

transaction with one of the persons listed in

paragraphs (b)(7)(i) through (b)(7)(viii) of this

Item 13 may have an indirect interest in the

transaction by reason of the position,

relationship, or interest. The interest in the

transaction, however, will not be deemed

‘‘material’’ within the meaning of paragraph

(b)(7) of this Item 13 where the interest of the

director or immediate family member arises

solely from the holding of an equity interest

(including a limited partnership interest, but

excluding a general partnership interest) or a

creditor interest in a company that is a party

to the transaction with one of the persons

specified in paragraphs (b)(7)(i) through

(b)(7)(viii) of this Item 13, and the transaction

is not material to the company.

7. The materiality of any interest is to be

determined on the basis of the significance of

the information to investors in light of all the

circumstances of the particular case. The

importance of the interest to the person

having the interest, the relationship of the

parties to the transaction with each other,

and the amount involved in the transaction

are among the factors to be considered in

determining the significance of the

information to investors.

8. No information need be given as to any

transaction where the interest of the director

or immediate family member arises solely

from the ownership of securities of a person

specified in paragraphs (b)(7)(i) through

(b)(7)(viii) of this Item 13 and the director or

immediate family member receives no extra

or special benefit not shared on a pro rata

basis by all holders of the class of securities.

9. Transactions include loans, lines of

credit, and other indebtedness. For

indebtedness, indicate the largest aggregate

amount of indebtedness outstanding at any

time during the period, the nature of the

indebtedness and the transaction in which it

was incurred, the amount outstanding as of

the end of the most recently completed

calendar year, and the rate of interest paid or

charged.

10. No information need be given as to any

routine, retail transaction. For example, the

Fund need not disclose that a director has a

credit card, bank or brokerage account,

residential mortgage, or insurance policy

with a person specified in paragraphs (b)(7)(i)

through (b)(7)(viii) of this Item 13 unless the

director is accorded special treatment.

(8) Describe briefly any direct or indirect

relationship, in which the amount involved

exceeds $60,000, of any director who is not

an interested person of the Fund, or

immediate family member of the director,

that existed at any time during the two most

recently completed calendar years with any

of the persons specified in paragraphs

(b)(7)(i) through (b)(7)(viii) of this Item 13.

Relationships include:

(i) Payments for property or services to or

from any person specified in paragraphs

(b)(7)(i) through (b)(7)(viii) of this Item 13;

(ii) Provision of legal services to any

person specified in paragraphs (b)(7)(i)

through (b)(7)(viii) of this Item 13;

(iii) Provision of investment banking

services to any person specified in

paragraphs (b)(7)(i) through (b)(7)(viii) of this

Item 13, other than as a participating

underwriter in a syndicate; and

(iv) Any consulting or other relationship

that is substantially similar in nature and

scope to the relationships listed in

paragraphs (b)(8)(i) through (b)(8)(iii) of this

Item 13.

Instructions. 1. Include the name of each

director or immediate family member whose

relationship is described and the nature of

the circumstances by reason of which the

relationship is required to be described.

2. State the nature of the relationship and

the amount of business conducted between

the director or immediate family member and

the person specified in paragraphs (b)(7)(i)

through (b)(7)(viii) of this Item 13 as a result

of the relationship during the two most

recently completed calendar years.

3. In computing the amount involved in a

relationship, include all periodic payments

in the case of any agreement providing for

periodic payments.

4. Disclose indirect, as well as direct,

relationships. A person who has a position or

relationship with, or interest in, a company

that has a relationship with one of the

persons listed in paragraphs (b)(7)(i) through

(b)(7)(viii) of this Item 13 may have an

indirect relationship by reason of the

position, relationship, or interest.

5. In determining whether the amount

involved in a relationship exceeds $60,000,

amounts involved in a relationship of the

director should be aggregated with those of

his immediate family members.

6. In the case of an indirect interest,

identify the company with which a person

specified in paragraphs (b)(7)(i) through

(b)(7)(viii) of this Item 13 has a relationship;

the name of the director or immediate family

member affiliated with the company and the

nature of the affiliation; and the amount of

business conducted between the company

and the person specified in paragraphs

(b)(7)(i) through (b)(7)(viii) of this Item 13

during the two most recently completed

calendar years.

7. In calculating payments for property and

services for purposes of paragraph (b)(8)(i) of

this Item 13, the following may be excluded:

A. Payments where the transaction

involves the rendering of services as a

common contract carrier, or public utility, at

rates or charges fixed in conformity with law

or governmental authority; or

B. Payments that arise solely from the

ownership of securities of a person specified

in paragraphs (b)(7)(i) through (b)(7)(viii) of

this Item 13 and no extra or special benefit

not shared on a pro rata basis by all holders

of the class of securities is received.

8. No information need be given as to any

routine, retail relationship. For example, the

Fund need not disclose that a director has a

credit card, bank or brokerage account,

residential mortgage, or insurance policy

with a person specified in paragraphs (b)(7)(i)

through (b)(7)(viii) of this Item 13 unless the

director is accorded special treatment.

(9) If an officer of an investment adviser or

principal underwriter of the Fund, or an

officer of a person directly or indirectly

controlling, controlled by, or under common

control with an investment adviser or

principal underwriter of the Fund, served

during the two most recently completed

calendar years, on the board of directors of

a company where a director of the Fund who

is not an interested person of the Fund, or

immediate family member of the director,

was during the two most recently completed

calendar years, an officer, identify:

(i) The company;

(ii) The individual who serves or has

served as a director of the company and the

period of service as director;

(iii) The investment adviser or principal

underwriter or person controlling, controlled

by, or under common control with the

investment adviser or principal underwriter

where the individual named in paragraph

(b)(9)(ii) of this Item 13 holds or held office

and the office held; and

(iv) The director of the Fund or immediate

family member who is or was an officer of

the company; the office held; and the period

of holding the office.

(10) Discuss in reasonable detail the

material factors and the conclusions with

respect thereto that formed the basis for the

board of directors approving the existing

investment advisory contract. If applicable,

include a discussion of any benefits derived

or to be derived by the investment adviser

from the relationship with the Fund such as

soft dollar arrangements by which brokers

provide research to the Fund or its

investment adviser in return for allocating

Fund brokerage.

Instruction. Conclusory statements or a list

of factors will not be considered sufficient

disclosure. The discussion should relate the

factors to the specific circumstances of the

Fund and the investment advisory contract.

* * * * *

Item 22. Financial Statements

* * * * *

(b) * * *

(5) The management information required

by Item 13(a)(1).

(6) A statement that the SAI includes

additional information about Fund directors

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3763

and is available, without charge, upon

request, and a toll-free (or collect) telephone

number for shareholders to call to request the

SAI.

* * * * *

Note: The text of Form N–2 does not and

these amendments will not appear in the

Code of Federal Regulations.

26. Form N–2 (referenced in §§ 239.14 and

274.11a-1) is amended by:

a. In Item 18 by adding Instructions 1 and

2 before paragraph 1.

b. In Item 18 by revising paragraphs 1 and

2.

c. In Item 18 by redesignating paragraphs

3 and 4 as paragraphs 4 and 14.

d. In Item 18 by adding paragraphs 3 and

5 through 13.

e. In Item 18, in newly designated

paragraph 14, removing ‘‘executive’’ from the

first sentence.

f. In Instruction 4 to Item 23 by removing

‘‘and’’ from the end of paragraph c.

g. In Instruction 4 to Item 23 by removing

the period at the end of paragraph d. and in

its place adding a semi-colon.

h. In Instruction 4 to Item 23 by adding

paragraphs e. and f.

These additions and revisions read as

follows:

Form N–2

* * * * *

Item 18. Management

Instructions: 1. For purposes of this Item

18, the terms below have the following

meanings:

a. The term ‘‘family of investment

companies’’ means any two or more

registered investment companies that:

(i) Share the same investment adviser or

principal underwriter; and

(ii) Hold themselves out to investors as

related companies for purposes of investment

and investor services.

b. The term ‘‘fund complex’’ means two or

more registered investment companies that:

(i) Hold themselves out to investors as

related companies for purposes of investment

and investor services; or

ii) Have a common investment adviser or

have an investment adviser that is an

affiliated person of the investment adviser of

any of the other registered investment

companies.

c. The term ‘‘immediate family member’’

means a person’s spouse; child residing in

the person’s household (including step and

adoptive children); and any dependent of the

person, as defined in section 152 of the

Internal Revenue Code (26 U.S.C. 152).

d. The term ‘‘officer’’ means the president,

vice-president, secretary, treasurer,

controller, or any other officer who performs

policy-making functions.

2. When providing information about

directors, furnish information for directors

who are interested persons of the Registrant,

as defined in Section 2(a)(19) of the 1940 Act

(15 U.S.C. 80a-2(a)(19)) and the rules

thereunder, separately from the information

for directors who are not interested persons

of the Registrant. For example, when

furnishing information in a table, you should

provide separate tables (or separate sections

of a single table) for directors who are

interested persons and for directors who are

not interested persons. When furnishing

information in narrative form, indicate by

heading or otherwise the directors who are

interested persons and the directors who are

not interested persons.

1. Provide the information required by the

following table for each director and officer

of the Registrant, and, if the Registrant has an

advisory board, member of the board. Explain

in a footnote to the table any family

relationship between the persons listed.

(1) (2) (3) (4) (5) (6)

Name, Address, and

Age.

Position(s) Held with

Registrant.

Term of Office and

Length of Time

Served.

Principal Occupation(s) During

Past 5 years.

Number of Portfolios

in Fund Complex

Overseen by Director.

Other Directorships Held by

Director.

Instructions: 1. For purposes of this

paragraph, the term ‘‘family relationship’’

means any relationship by blood, marriage,

or adoption, not more remote than first

cousin.

2. For each director who is an interested

person of the Registrant, as defined in

Section 2(a)(19) of the 1940 Act (15 U.S.C.

80a–2(a)(19)) and the rules thereunder,

describe, in a footnote or otherwise, the

relationship, events, or transactions by

reason of which the director is an interested

person.

3. State the principal business of any

company listed under column (4) unless the

principal business is implicit in its name.

4. Indicate in column (6) directorships not

included in column (5) that are held by a

director in any company with a class of

securities registered pursuant to section 12 of

the Exchange Act (15 U.S.C. 78l) or subject

to the requirements of section 15(d) of the

Exchange Act (15 U.S.C. 78o(d)) or any

company registered as an investment

company under the 1940 Act (15 U.S.C. 80a),

and name the companies in which the

directorships are held. Where the other

directorships include directorships

overseeing two or more portfolios in the same

fund complex, identify the fund complex and

provide the number of portfolios overseen as

a director in the fund complex rather than

listing each portfolio separately.

2. For each individual listed in column (1)

of the table required by paragraph 1 of this

Item 18, except for any director who is not

an interested person of the Registrant, as

defined in Section 2(a)(19) of the 1940 Act

(15 U.S.C. 80a–2(a)(19)) and the rules

thereunder, describe any positions, including

as an officer, employee, director, or general

partner, held with affiliated persons or

principal underwriters of the Registrant.

Instruction: When an individual holds the

same position(s) with two or more registered

investment companies that are part of the

same fund complex, identify the fund

complex and provide the number of

registered investment companies for which

the position(s) are held rather than listing

each registered investment company

separately.

3. Describe briefly any arrangement or

understanding between any director or

officer and any other person(s) (naming the

person(s)) pursuant to which he was selected

as a director or officer.

Instruction: Do not include arrangements

or understandings with directors or officers

acting solely in their capacities as such.

4. For each non-resident director or officer

of the Registrant listed in column (1) of the

table required by paragraph 1, disclose

whether he has authorized an agent in the

United States to receive notice and, if so,

disclose the name and address of the agent.

5. Identify the standing committees of the

Registrant’s board of directors, and provide

the following information about each

committee:

(a) A concise statement of the functions of

the committee;

(b) The members of the committee;

(c) The number of committee meetings

held during the last fiscal year; and

(d) If the committee is a nominating or

similar committee, state whether the

committee will consider nominees

recommended by security holders and, if so,

describe the procedures to be followed by

security holders in submitting

recommendations.

6. Unless disclosed in the table required by

paragraph 1 of this Item 18, describe any

positions, including as an officer, employee,

director, or general partner, held by any

director who is not an interested person of

the Registrant, as defined in Section 2(a)(19)

of the 1940 Act (15 U.S.C. 80a–2(a)(19)) and

the rules thereunder, or immediate family

member of the director, during the two most

recently completed calendar years with:

(a) The Registrant;

(b) An investment company, or a person

that would be an investment company but for

the exclusions provided by sections 3(c)(1)

and 3(c)(7) of the 1940 Act (15 U.S.C. 80a–

3 (c)(1) and (c)(7)), having the same

investment adviser or principal underwriter

as the Registrant or having an investment

adviser or principal underwriter that directly

or indirectly controls, is controlled by, or is

under common control with an investment

adviser or principal underwriter of the

Registrant;

(c) An investment adviser, principal

underwriter, or affiliated person of the

Registrant; or

3764 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

(d) Any person directly or indirectly

controlling, controlled by, or under common

control with an investment adviser or

principal underwriter of the Registrant.

Instruction: When an individual holds the

same position(s) with two or more portfolios

that are part of the same fund complex,

identify the fund complex and provide the

number of portfolios for which the

position(s) are held rather than listing each

portfolio separately.

7. For each director, state the dollar range

of equity securities beneficially owned by the

director as required by the following table:

(i) In the Registrant; and

(ii) On an aggregate basis, in any registered

investment companies overseen by the

director within the same family of

investment companies as the Registrant.

(1) (2) (3)

Name of Director ............................................... Dollar Range of Equity Securities in the Registrant.Aggregate Dollar Range of Equity Securities

in All Registered Investment Companies

Overseen by Director in Family of Investment Companies

Instructions: 1. Information should be

provided as of the end of the most recently

completed calendar year. Specify the

valuation date by footnote or otherwise.

2. Determine ‘‘beneficial ownership’’ in

accordance with rule 16a–1(a)(2) under the

Exchange Act (17 CFR 240.16a–1(a)(2)).

3. In disclosing the dollar range of equity

securities beneficially owned by a director in

columns (2) and (3), use the following ranges:

none, $1–$10,000, $10,001–$50,000,

$50,001–$100,000, or over $100,000.

8. For each director who is not an

interested person of the Registrant, as defined

in Section 2(a)(19) of the 1940 Act (15 U.S.C.

80a–2(a)(19)) and the rules thereunder, and

his immediate family members, furnish the

information required by the following table

as to each class of securities owned

beneficially or of record in:

(a) An investment adviser or principal

underwriter of the Registrant; or

(b) A person (other than a registered

investment company) directly or indirectly

controlling, controlled by, or under common

control with an investment adviser or

principal underwriter of the Registrant:

(1) (2) (3) (4) (5) (6)

Name of Director ....... Name of Owners and

Relationships to Director.

Company ................... Title of Class ............. Value of Securities .... Percent of Class

Instructions: 1. Information should be

provided as of the end of the most recently

completed calendar year. Specify the

valuation date by footnote or otherwise.

2. An individual is a ‘‘beneficial owner’’ of

a security if he is a ‘‘beneficial owner’’ under

either rule 13d–3 or rule 16a–1(a)(2) under

the Exchange Act (17 CFR 240.13d–3 or

240.16a–1(a)(2)).

3. Identify the company in which the

director or immediate family member of the

director owns securities in column (3). When

the company is a person directly or indirectly

controlling, controlled by, or under common

control with an investment adviser or

principal underwriter, describe the

company’s relationship with the investment

adviser or principal underwriter.

4. Provide the information required by

columns (5) and (6) on an aggregate basis for

each director and his immediate family

members.

9. Unless disclosed in response to

paragraph 8 of this Item 18, describe any

direct or indirect interest, the value of which

exceeds $60,000, of each director who is not

an interested person of the Registrant, as

defined in Section 2(a)(19) of the 1940 Act

(15 U.S.C. 80a–2(a)(19)) and the rules

thereunder, or immediate family member of

the director, during the two most recently

completed calendar years, in:

(a) An investment adviser or principal

underwriter of the Registrant; or

(b) A person (other than a registered

investment company) directly or indirectly

controlling, controlled by, or under common

control with an investment adviser or

principal underwriter of the Registrant.

Instructions: 1. A director or immediate

family member has an interest in a company

if he is a party to a contract, arrangement, or

understanding with respect to any securities

of, or interest in, the company.

2. The interest of the director and the

interests of his immediate family members

should be aggregated in determining whether

the value exceeds $60,000.

10. Describe briefly any material interest,

direct or indirect, of any director who is not

an interested person of the Registrant, as

defined in Section 2(a)(19) of the 1940 Act

(15 U.S.C. 80a–2(a)(19)) and the rules

thereunder, or immediate family member of

the director, in any transaction, or series of

similar transactions, during the two most

recently completed calendar years, in which

the amount involved exceeds $60,000 and to

which any of the following persons was a

party:

(a) The Registrant;

(b) An officer of the Registrant;

(c) An investment company, or a person

that would be an investment company but for

the exclusions provided by sections 3(c)(1)

and 3(c)(7) of the 1940 Act (15 U.S.C. 80a–

3(c)(1) and (c)(7)), having the same

investment adviser or principal underwriter

as the Registrant or having an investment

adviser or principal underwriter that directly

or indirectly controls, is controlled by, or is

under common control with an investment

adviser or principal underwriter of the

Registrant;

(d) An officer of an investment company,

or a person that would be an investment

company but for the exclusions provided by

sections 3(c)(1) and 3(c)(7) of the 1940 Act

(15 U.S.C. 80a–3(c)(1) and (c)(7)), having the

same investment adviser or principal

underwriter as the Registrant or having an

investment adviser or principal underwriter

that directly or indirectly controls, is

controlled by, or is under common control

with an investment adviser or principal

underwriter of the Registrant;

(e) An investment adviser or principal

underwriter of the Registrant;

(f) An officer of an investment adviser or

principal underwriter of the Registrant;

(g) A person directly or indirectly

controlling, controlled by, or under common

control with an investment adviser or

principal underwriter of the Registrant; or

(h) An officer of a person directly or

indirectly controlling, controlled by, or under

common control with an investment adviser

or principal underwriter of the Registrant.

Instructions: 1. Include the name of each

director or immediate family member whose

interest in any transaction or series of similar

transactions is described and the nature of

the circumstances by reason of which the

interest is required to be described.

2. State the nature of the interest, the

approximate dollar amount involved in the

transaction, and, where practicable, the

approximate dollar amount of the interest.

3. In computing the amount involved in

the transaction or series of similar

transactions, include all periodic payments

in the case of any lease or other agreement

providing for periodic payments.

4. Compute the amount of the interest of

any director or immediate family member of

the director without regard to the amount of

profit or loss involved in the transaction(s).

5. As to any transaction involving the

purchase or sale of assets, state the cost of the

assets to the purchaser and, if acquired by the

seller within two years prior to the

transaction, the cost to the seller. Describe

the method used in determining the purchase

or sale price and the name of the person

making the determination.

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3765

6. Disclose indirect, as well as direct,

material interests in transactions. A person

who has a position or relationship with, or

interest in, a company that engages in a

transaction with one of the persons listed in

paragraphs 10(a) through (h) of this Item 18

may have an indirect interest in the

transaction by reason of the position,

relationship, or interest. The interest in the

transaction, however, will not be deemed

‘‘material’’ within the meaning of paragraph

10 of this Item 18 where the interest of the

director or immediate family member arises

solely from the holding of an equity interest

(including a limited partnership interest, but

excluding a general partnership interest) or a

creditor interest in a company that is a party

to the transaction with one of the persons

specified in paragraphs 10(a) through (h) of

this Item 18, and the transaction is not

material to the company.

7. The materiality of any interest is to be

determined on the basis of the significance of

the information to investors in light of all the

circumstances of the particular case. The

importance of the interest to the person

having the interest, the relationship of the

parties to the transaction with each other,

and the amount involved in the transaction

are among the factors to be considered in

determining the significance of the

information to investors.

8. No information need be given as to any

transaction where the interest of the director

or immediate family member arises solely

from the ownership of securities of a person

specified in paragraphs 10(a) through (h) of

this Item 18 and the director or immediate

family member receives no extra or special

benefit not shared on a pro rata basis by all

holders of the class of securities.

9. Transactions include loans, lines of

credit, and other indebtedness. For

indebtedness, indicate the largest aggregate

amount of indebtedness outstanding at any

time during the period, the nature of the

indebtedness and the transaction in which it

was incurred, the amount outstanding as of

the end of the most recently completed

calendar year, and the rate of interest paid or

charged.

10. No information need be given as to any

routine, retail transaction. For example, the

Registrant need not disclose that a director

has a credit card, bank or brokerage account,

residential mortgage, or insurance policy

with a person specified in paragraphs 10(a)

through (h) of this Item 18 unless the director

is accorded special treatment.

11. Describe briefly any direct or indirect

relationship, in which the amount involved

exceeds $60,000, of any director who is not

an interested person of the Registrant, as

defined in Section 2(a)(19) of the 1940 Act

(15 U.S.C. 80a–2(a)(19)) and the rules

thereunder, or immediate family member of

the director, that existed at any time during

the two most recently completed calendar

years, with any of the persons specified in

paragraphs 10(a) through (h) of this Item 18.

Relationships include:

(a) Payments for property or services to or

from any person specified in paragraphs

10(a) through (h) of this Item 18;

(b) Provision of legal services to any person

specified in paragraphs 10(a) through (h) of

this Item 18;

(c) Provision of investment banking

services to any person specified in

paragraphs 10(a) through (h) of this Item 18,

other than as a participating underwriter in

a syndicate; and

(d) Any consulting or other relationship

that is substantially similar in nature and

scope to the relationships listed in

paragraphs 11(a) through (c) of this Item 18.

Instructions: 1. Include the name of each

director or immediate family member whose

relationship is described and the nature of

the circumstances by reason of which the

relationship is required to be described.

2. State the nature of the relationship and

the amount of business conducted between

the director or immediate family member and

the person specified in paragraphs 10(a)

through (h) of this Item 18 as a result of the

relationship during the two most recently

completed calendar years.

3. In computing the amount involved in a

relationship, include all periodic payments

in the case of any agreement providing for

periodic payments.

4. Disclose indirect, as well as direct,

relationships. A person who has a position or

relationship with, or interest in, a company

that has a relationship with one of the

persons listed in paragraphs 10(a) through (h)

of this Item 18 may have an indirect

relationship by reason of the position,

relationship, or interest.

5. In determining whether the amount

involved in a relationship exceeds $60,000,

amounts involved in a relationship of the

director should be aggregated with those of

his immediate family members.

6. In the case of an indirect interest,

identify the company with which a person

specified in paragraphs 10(a) through (h) of

this Item 18 has a relationship; the name of

the director or immediate family member

affiliated with the company and the nature of

the affiliation; and the amount of business

conducted between the company and the

person specified in paragraphs 10(a) through

(h) of this Item 18 during the two most

recently completed calendar years.

7. In calculating payments for property and

services for purposes of paragraph 11(a) of

this Item 18, the following may be excluded:

a. Payments where the transaction involves

the rendering of services as a common

contract carrier, or public utility, at rates or

charges fixed in conformity with law or

governmental authority; or

b. Payments that arise solely from the

ownership of securities of a person specified

in paragraphs 10(a) through (h) of this Item

18 and no extra or special benefit not shared

on a pro rata basis by all holders of the class

of securities is received.

8. No information need be given as to any

routine, retail relationship. For example, the

Registrant need not disclose that a director

has a credit card, bank or brokerage account,

residential mortgage, or insurance policy

with a person specified in paragraphs 10(a)

through (h) of this Item 18 unless the director

is accorded special treatment.

12. If an officer of an investment adviser

or principal underwriter of the Registrant, or

an officer of a person directly or indirectly

controlling, controlled by, or under common

control with an investment adviser or

principal underwriter of the Registrant,

served during the two most recently

completed calendar years, on the board of

directors of a company where a director of

the Registrant who is not an interested

person of the Registrant, as defined in

Section 2(a)(19) of the 1940 Act (15 U.S.C.

80a–2(a)(19)) and the rules thereunder, or

immediate family member of the director,

was during the two most recently completed

calendar years, an officer, identify:

(a) The company;

(b) The individual who serves or has

served as a director of the company and the

period of service as director;

(c) The investment adviser or principal

underwriter or person controlling, controlled

by, or under common control with the

investment adviser or principal underwriter

where the individual named in paragraph

12(b) of this Item 18 holds or held office and

the office held; and

(d) The director of the Registrant or

immediate family member who is or was an

officer of the company; the office held; and

the period of holding the office.

13. Discuss in reasonable detail the

material factors and the conclusions with

respect thereto that formed the basis for the

board of directors approving the existing

investment advisory contract. If applicable,

include a discussion of any benefits derived

or to be derived by the investment adviser

from the relationship with the Registrant

such as soft dollar arrangements by which

brokers provide research to the Registrant or

its investment adviser in return for allocating

fund brokerage.

Instruction: Conclusory statements or a list

of factors will not be considered sufficient

disclosure. The discussion should relate the

factors to the specific circumstances of the

Registrant and the investment advisory

contract.

* * * * *

Item 23. Financial Statements

* * * * *

Instructions

* * * * *

4. * * *

e. the management information required by

paragraph 1 of Item 18; and

f. a statement that the SAI includes

additional information about directors of the

Registrant and is available, without charge,

upon request, and a toll-free (or collect)

telephone number for shareholders to call to

request the SAI.

* * * * *

Note: The text of Form N–3 does not and

these amendments will not appear in the

Code of Federal Regulations.

27. Form N–3 (referenced in §§ 239.17a

and 274.11b) is amended by:

a. In Item 20 adding instructions 1 and 2

before paragraph (a).

b. In Item 20 by revising paragraphs (a) and

(b).

c. In Item 20 by redesignating paragraph (c)

as paragraph (m).

d. In Item 20 by adding paragraphs (c)

through (l).

3766 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

e. In Item 20 by removing ‘‘executive’’ from

the first sentence of newly designated

paragraph (m).

f. In Instruction 4 to Item 27 by removing

‘‘and’’ from the end of paragraph (iii).

g. In Instruction 4 to Item 27 by removing

the period at the end of paragraph (iv) and

in its place adding a semi-colon.

h. In Instruction 4 to Item 27 by adding

paragraphs (v) and (vi).

These additions, and revisions read as

follows:

Form N–3

* * * * *

Item 20. Management

Instructions: 1. For purposes of this Item

20, the terms below have the following

meanings:

a. The term ‘‘family of investment

companies’’ means any two or more

registered investment companies that:

(i) Share the same investment adviser or

principal underwriter; and

(ii) Hold themselves out to investors as

related companies for purposes of investment

and investor services.

b. The term ‘‘fund complex’’ means two or

more registered investment companies that:

(i) Hold themselves out to investors as

related companies for purposes of investment

and investor services; or

(ii) Have a common investment adviser or

have an investment adviser that is an

affiliated person of the investment adviser of

any of the other registered investment

companies.

c. The term ‘‘immediate family member’’

means a person’s spouse; child residing in

the person’s household (including step and

adoptive children); and any dependent of the

person, as defined in section 152 of the

Internal Revenue Code (26 U.S.C. 152).

d. The term ‘‘officer’’ means the president,

vice-president, secretary, treasurer,

controller, or any other officer who performs

policy-making functions.

2. When providing information about

directors, furnish information for directors

who are interested persons of the Registrant,

as defined in Section 2(a)(19) of the 1940 Act

(15 U.S.C. 80a–2(a)(19)) and the rules

thereunder, separately from the information

for directors who are not interested persons

of the Registrant. For example, when

furnishing information in a table, you should

provide separate tables (or separate sections

of a single table) for directors who are

interested persons and for directors who are

not interested persons. When furnishing

information in narrative form, indicate by

heading or otherwise the directors who are

interested persons and the directors who are

not interested persons.

(a) Provide the information required by the

following table for each member of the board

of managers (‘‘director’’) and officer of the

Registrant, and, if the Registrant has an

advisory board, member of the board. Explain

in a footnote to the table any family

relationship between the persons listed.

(1) (2) (3) (4) (5) (6)

Name, address, and

age.

Position(s) held with

registrant.

Term of office and

length of time

served.

Principal occupation(s) during past 5

years.

Number of portfolios

in fund complex

overseen by director.

Other directorships

held by director.

Instructions: 1. For purposes of this

paragraph, the term ‘‘family relationship’’

means any relationship by blood, marriage,

or adoption, not more remote than first

cousin.

2. For each director who is an interested

person of the Registrant, as defined in

Section 2(a)(19) of the 1940 Act (15 U.S.C.

80a–2(a)(19)) and the rules thereunder,

describe, in a footnote or otherwise, the

relationship, events, or transactions by

reason of which the director is an interested

person.

3. State the principal business of any

company listed under column (4) unless the

principal business is implicit in its name.

4. Indicate in column (6) directorships not

included in column (5) that are held by a

director in any company with a class of

securities registered pursuant to section 12 of

the Exchange Act (15 U.S.C. 78l) or subject

to the requirements of section 15(d) of the

Exchange Act (15 U.S.C. 78o(d)) or any

company registered as an investment

company under the 1940 Act (15 U.S.C. 80a–

2(a)(19)), and name the companies in which

the directorships are held. Where the other

directorships include directorships

overseeing two or more portfolios in the same

fund complex, identify the fund complex and

provide the number of portfolios overseen as

a director in the fund complex rather than

listing each portfolio separately.

(b) For each individual listed in column (1)

of the table required by paragraph (a) of this

Item 20, except for any director who is not

an interested person of the Registrant, as

defined in Section 2(a)(19) of the 1940 Act

(15 U.S.C. 80a–2(a)(19)) and the rules

thereunder, describe any positions, including

as an officer, employee, director, or general

partner, held with affiliated persons or

principal underwriters of the Registrant.

Instruction: When an individual holds the

same position(s) with two or more registered

investment companies that are part of the

same fund complex, identify the fund

complex and provide the number of

registered investment companies for which

the position(s) are held rather than listing

each registered investment company

separately.

(c) Describe briefly any arrangement or

understanding between any director or

officer and any other person(s) (naming the

person(s)) pursuant to which he was selected

as a director or officer.

Instruction: Do not include arrangements

or understandings with directors or officers

acting solely in their capacities as such.

(d) Identify the standing committees of the

Registrant’s board of managers, and provide

the following information about each

committee:

(i) A concise statement of the functions of

the committee;

(ii) The members of the committee;

(iii) The number of committee meetings

held during the last fiscal year; and

(iv) If the committee is a nominating or

similar committee, state whether the

committee will consider nominees

recommended by security holders and, if so,

describe the procedures to be followed by

security holders in submitting

recommendations.

(e) Unless disclosed in the table required

by paragraph (a) of this Item 20, describe any

positions, including as an officer, employee,

director, or general partner, held by any

director who is not an interested person of

the Registrant, as defined in Section 2(a)(19)

of the 1940 Act (15 U.S.C. 80a–2(a)(19)) and

the rules thereunder, or immediate family

member of the director, during the two most

recently completed calendar years with:

(i) The Registrant;

(ii) An investment company, or a person

that would be an investment company but for

the exclusions provided by sections 3(c)(1)

and 3(c)(7) of the 1940 Act (15 U.S.C. 80a–

3(c)(1) and (c)(7)), having the same Insurance

Company, investment adviser, or principal

underwriter as the Registrant or having an

Insurance Company, investment adviser, or

principal underwriter that directly or

indirectly controls, is controlled by, or is

under common control with the Insurance

Company or an investment adviser or

principal underwriter of the Registrant;

(iii) The Insurance Company or an

investment adviser, principal underwriter, or

affiliated person of the Registrant; or

(iv) Any person directly or indirectly

controlling, controlled by, or under common

control with the Insurance Company or an

investment adviser or principal underwriter

of the Registrant.

Instruction: When an individual holds the

same position(s) with two or more portfolios

that are part of the same fund complex,

identify the fund complex and provide the

number of portfolios for which the

position(s) are held rather than listing each

portfolio separately.

(f) For each director, state the dollar range

of equity securities beneficially owned by the

director as required by the following table:

(i) In the Registrant; and

(ii) On an aggregate basis, in any registered

investment companies overseen by the

director within the same family of

investment companies as the Registrant.

Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations 3767

(1) (2) (3)

Name of Director ............................................... Dollar Range of Equity Securities in the Registrant.Aggregate Dollar Range of Equity Securities

in All Registered Investment Companies

Overseen by Director in Family of Investment Companies.

Instructions: 1. Information should be

provided as of the end of the most recently

completed calendar year. Specify the

valuation date by footnote or otherwise.

2. Determine ‘‘beneficial ownership’’ in

accordance with rule 16a–1(a)(2) under the

Exchange Act (17 CFR 240.16a–1(a)(2)).

3. If the SAI covers more than one subaccount, disclose in column (2) the dollar

range of equity securities beneficially owned

by a director in each sub-account overseen by

the director.

4. In disclosing the dollar range of equity

securities beneficially owned by a director in

columns (2) and (3), use the following ranges:

none, $1–$10,000, $10,001–$50,000,

$50,001–$100,000, or over $100,000.

(g) For each director who is not an

interested person of the Registrant, as defined

in Section 2(a)(19) of the 1940 Act (15 U.S.C.

80a–2(a)(19)) and the rules thereunder, and

his immediate family members, furnish the

information required by the following table

as to each class of securities owned

beneficially or of record in:

(i) The Insurance Company or an

investment adviser or principal underwriter

of the Registrant; or

(ii) A person (other than a registered

investment company) directly or indirectly

controlling, controlled by, or under common

control with the Insurance Company or an

investment adviser or principal underwriter

of the Registrant:

(1) (2) (3) (4) (5) (6)

Name of Director ....... Name of Owners and

Relationships to Director.

Company ................... Title of Class ............. Value of Securities .... Percent of Class.

Instructions: 1. Information should be

provided as of the end of the most recently

completed calendar year. Specify the

valuation date by footnote or otherwise.

2. An individual is a ‘‘beneficial owner’’ of

a security if he is a ‘‘beneficial owner’’ under

either rule 13d–3 or rule 16a–1(a)(2) under

the Exchange Act (17 C.F.R. 240.13d–3 or

240.16a–1(a)(2)).

3. Identify the company in which the

director or immediate family member of the

director owns securities in column (3). When

the company is a person directly or indirectly

controlling, controlled by, or under common

control with the Insurance Company or an

investment adviser or principal underwriter,

describe the company’s relationship with the

Insurance Company, investment adviser, or

principal underwriter.

4. Provide the information required by

columns (5) and (6) on an aggregate basis for

each director and his immediate family

members.

(h) Unless disclosed in response to

paragraph (g) of this Item 20, describe any

direct or indirect interest, the value of which

exceeds $60,000, of each director who is not

an interested person of the Registrant, as

defined in Section 2(a)(19) of the 1940 Act

(15 U.S.C. 80a–2(a)(19)) and the rules

thereunder, or immediate family member of

the director, during the two most recently

completed calendar years, in:

(i) The Insurance Company or an

investment adviser or principal underwriter

of the Registrant; or

(ii) A person (other than a registered

investment company) directly or indirectly

controlling, controlled by, or under common

control with the Insurance Company or an

investment adviser or principal underwriter

of the Registrant.

Instructions: 1. A director or immediate

family member has an interest in a company

if he is a party to a contract, arrangement, or

understanding with respect to any securities

of, or interest in, the company.

2. The interest of the director and the

interests of his immediate family members

should be aggregated in determining whether

the value exceeds $60,000.

(i) Describe briefly any material interest,

direct or indirect, of any director who is not

an interested person of the Registrant, as

defined in Section 2(a)(19) of the 1940 Act

(15 U.S.C. 80a–2(a)(19)) and the rules

thereunder, or immediate family member of

the director, in any transaction, or series of

similar transactions, during the two most

recently completed calendar years, in which

the amount involved exceeds $60,000 and to

which any of the following persons was a

party:

(i) The Registrant;

(ii) An officer of the Registrant;

(iii)An investment company, or a person

that would be an investment company but for

the exclusions provided by sections 3(c)(1)

and 3(c)(7) of the 1940 Act (15 U.S.C. 80a–

3(c)(1) and (c)(7)), having the same Insurance

Company, investment adviser, or principal

underwriter as the Registrant or having an

Insurance Company, investment adviser, or

principal underwriter that directly or

indirectly controls, is controlled by, or is

under common control with the Insurance

Company or an investment adviser or

principal underwriter of the Registrant;

(iv) An officer of an investment company,

or a person that would be an investment

company but for the exclusions provided by

sections 3(c)(1) and 3(c)(7) of the 1940 Act

(15 U.S.C. 80a–3(c)(1) and (c)(7)), having the

same Insurance Company, investment

adviser, or principal underwriter as the

Registrant or having an Insurance Company,

investment adviser, or principal underwriter

that directly or indirectly controls, is

controlled by, or is under common control

with the Insurance Company or an

investment adviser or principal underwriter

of the Registrant;

(v) The Insurance Company or an

investment adviser or principal underwriter

of the Registrant;

(vi) An officer of the Insurance Company

or an investment adviser or principal

underwriter of the Registrant;

(vii) A person directly or indirectly

controlling, controlled by, or under common

control with the Insurance Company or an

investment adviser or principal underwriter

of the Registrant; or

(viii) An officer of a person directly or

indirectly controlling, controlled by, or under

common control with the Insurance

Company or an investment adviser or

principal underwriter of the Registrant.

Instructions: 1. Include the name of each

director or immediate family member whose

interest in any transaction or series of similar

transactions is described and the nature of

the circumstances by reason of which the

interest is required to be described.

2. State the nature of the interest, the

approximate dollar amount involved in the

transaction, and, where practicable, the

approximate dollar amount of the interest.

3. In computing the amount involved in

the transaction or series of similar

transactions, include all periodic payments

in the case of any lease or other agreement

providing for periodic payments.

4. Compute the amount of the interest of

any director or immediate family member of

the director without regard to the amount of

profit or loss involved in the transaction(s).

5. As to any transaction involving the

purchase or sale of assets, state the cost of the

assets to the purchaser and, if acquired by the

seller within two years prior to the

transaction, the cost to the seller. Describe

the method used in determining the purchase

or sale price and the name of the person

making the determination.

6. Disclose indirect, as well as direct,

material interests in transactions. A person

who has a position or relationship with, or

interest in, a company that engages in a

3768 Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / Rules and Regulations

transaction with one of the persons listed in

paragraphs (i) through (viii) of paragraph (i)

of this Item 20 may have an indirect interest

in the transaction by reason of the position,

relationship, or interest. The interest in the

transaction, however, will not be deemed

‘‘material’’ within the meaning of paragraph

(i) of this Item 20 where the interest of the

director or immediate family member arises

solely from the holding of an equity interest

(including a limited partnership interest, but

excluding a general partnership interest) or a

creditor interest in a company that is a party

to the transaction with one of the persons

specified in paragraphs (i) through (viii) of

paragraph (i) of this Item 20, and the

transaction is not material to the company.

7. The materiality of any interest is to be

determined on the basis of the significance of

the information to investors in light of all the

circumstances of the particular case. The

importance of the interest to the person

having the interest, the relationship of the

parties to the transaction with each other,

and the amount involved in the transaction

are among the factors to be considered in

determining the significance of the

information to investors.

8. No information need be given as to any

transaction where the interest of the director

or immediate family member arises solely

from the ownership of securities of a person

specified in paragraphs (i) through (viii) of

paragraph (i) of this Item 20 and the director

or immediate family member receives no

extra or special benefit not shared on a pro

rata basis by all holders of the class of

securities.

9. Transactions include loans, lines of

credit, and other indebtedness. For

indebtedness, indicate the largest aggregate

amount of indebtedness outstanding at any

time during the period, the nature of the

indebtedness and the transaction in which it

was incurred, the amount outstanding as of

the end of the most recently completed

calendar year, and the rate of interest paid or

charged.

10. No information need be given as to any

routine, retail transaction. For example, the

Registrant need not disclose that a director

has a credit card, bank or brokerage account,

residential mortgage, or insurance policy

with a person specified in paragraphs (i)

through (viii) of paragraph (i) of this Item 20

unless the director is accorded special

treatment.

(j) Describe briefly any direct or indirect

relationship, in which the amount involved

exceeds $60,000, of any director who is not

an interested person of the Registrant, as

defined in Section 2(a)(19) of the 1940 Act

(15 U.S.C. 80a–2(a)(19)) and the rules

thereunder, or immediate family member of

the director, that existed at any time during

the two most recently completed calendar

years, with any of the persons specified in

paragraphs (i) through (viii) of paragraph (i)

of this Item 20. Relationships include:

(i) Payments for property or services to or

from any person specified in paragraphs (i)

through (viii) of paragraph (i) of this Item 20;

(ii) Provision of legal services to any

person specified in paragraphs (i) through

(viii) of paragraph (i) of this Item 20;

(iii) Provision of investment banking

services to any person specified in

paragraphs (i) through (viii) of paragraph (i)

of this Item 20, other than as a participating

underwriter in a syndicate; and

(iv) Any consulting or other relationship

that is substantially similar in nature and

scope to the relationships listed in

paragraphs (j)(i) through (j)(iii) of this Item

20.

Instructions: 1. Include the name of each

director or immediate family member whose

relationship is described and the nature of

the circumstances by reason of which the

relationship is required to be described.

2. State the nature of the relationship and

the amount of business conducted between

the director or immediate family member and

the person specified in paragraphs (i) through

(viii) of paragraph (i) of this Item 20 as a

result of the relationship during the two most

recently completed calendar years.

3. In computing the amount involved in a

relationship, include all periodic payments

in the case of any agreement providing for

periodic payments.

4. Disclose indirect, as well as direct,

relationships. A person who has a position or

relationship with, or interest in, a company

that has a relationship with one of the

persons listed in paragraphs (i) through (viii)

of paragraph (i) of this Item 20 may have an

indirect relationship by reason of the

position, relationship, or interest.

5. In determining whether the amount

involved in a relationship exceeds $60,000,

amounts involved in a relationship of the

director should be aggregated with those of

his immediate family members.

6. In the case of an indirect interest,

identify the company with which a person

specified in paragraphs (i) through (viii) of

paragraph (i) of this Item 20 has a

relationship; the name of the director or

immediate family member affiliated with the

company and the nature of the affiliation;

and the amount of business conducted

between the company and the person

specified in paragraphs (i) through (viii) of

paragraph (i) of this Item 20 during the two

most recently completed calendar years.

7. In calculating payments for property and

services for purposes of paragraph (j)(i) of

this Item 20, the following may be excluded:

a. Payments where the transaction involves

the rendering of services as a common

contract carrier, or public utility, at rates or

charges fixed in conformity with law or

governmental authority; or

b. Payments that arise solely from the

ownership of securities of a person specified

in paragraphs (i) through (viii) of paragraph

(i) of this Item 20 and no extra or special

benefit not shared on a pro rata basis by all

holders of the class of securities is received.

8. No information need be given as to any

routine, retail relationship. For example, the

Registrant need not disclose that a director

has a credit card, bank or brokerage account,

residential mortgage, or insurance policy

with a person specified in paragraphs (i)

through (viii) of paragraph (i) of this Item 20

unless the director is accorded special

treatment.

(k) If an officer of the Insurance Company

or an investment adviser or principal

underwriter of the Registrant, or an officer of

a person directly or indirectly controlling,

controlled by, or under common control with

the Insurance Company or an investment

adviser or principal underwriter of the

Registrant, served during the two most

recently completed calendar years, on the

board of directors of a company where a

director of the Registrant who is not an

interested person of the Registrant, as defined

in Section 2(a)(19) of the 1940 Act (15 U.S.C.

80a–2(a)(19)) and the rules thereunder, or

immediate family member of the director,

was during the two most recently completed

calendar years, an officer, identify:

(i) The company;

(ii) The individual who serves or has

served as a director of the company and the

period of service as director;

(iii) The Insurance Company, investment

adviser, or principal underwriter or person

controlling, controlled by, or under common

control with the Insurance Company,

investment adviser, or principal underwriter

where the individual named in paragraph

(k)(ii) of this Item 20 holds or held office and

the office held; and

(iv) The director of the Registrant or

immediate family member who is or was an

officer of the company; the office held; and

the period of holding the office.

(l) Discuss in reasonable detail the material

factors and the conclusions with respect

thereto that formed the basis for the board of

managers approving the existing investment

advisory contract. If applicable, include a

discussion of any benefits derived or to be

derived by the investment adviser from the

relationship with the Registrant such as soft

dollar arrangements by which brokers

provide research to the Registrant or its

investment adviser in return for allocating

fund brokerage.

Instruction: Conclusory statements or a list

of factors will not be considered sufficient

disclosure. The discussion should relate the

factors to the specific circumstances of the

Registrant and the investment advisory

contract.

* * * * *

Item 27. Financial Statements

* * * * *

Instructions

* * * * *

4. * * *

(v) the management information required

by paragraph (a) of Item 20; and

(vi) a statement that the SAI includes

additional information about members of the

board of managers of the Registrant and is

available, without charge, upon request, and

a toll-free (or collect) telephone number for

contract owners to call to request the SAI.

* * * * *

By the Commission.

Dated: January 2, 2001.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–536 Filed 1–12–01; 8:45 am]

BILLING CODE 8010–01–P