September 25, 1990
TO: BOARD OF GOVERNORS NO. 70-90
RE: INSTITUTE COMMENT LETTER ON SEC CONCEPT RELEASE
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Comments on the SEC Comment Release regarding reform of the
regulation of investment companies must be filed with the SEC by
October 10. Therefore, at its meeting on October 4 the Board of
Governors will consider the attached draft Institute comment
letter, which has been prepared by the Institute's 1990s Ad Hoc
Committee and approved by the Executive Committee. (Also
attached is a draft of Steve West's 1990s regulatory report which
provides background, options and recommendations which conform to
those in the draft comment letter.)
Institute Comment Letter
With the exception of two changes suggested by the Executive
Committee, the attached draft comment letter is based on the
recommendations of the Institute's 1990s Ad Hoc Committee, which
has met six times over the past two years. Representatives from
over 20 different fund groups, representing about 60 percent of
industry assets, attended the final meeting at which the draft
letter was reviewed and approved. Therefore, the attached draft
represents a very broad consensus within the industry.
The following is a brief discussion of the major
recommendations contained in the letter.
1. All publicly-offered pools of securities (including
bank common and collective funds, asset-backed
arrangements and mortgage REITs) should be made subject
to the Investment Company Act with the SEC authorized
to promulgate appropriate rules and exemptions for
particular types of pools, as it has done for variable
insurance products. The Ad Hoc Committee voted 18 to 2
in favor of this recommendation.
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2. Managed investment companies should be permitted to
option of organizing either in traditional corporate
form or in unitary (contract) form, the predominant
structure used in other countries. The vote of the Ad
Hoc Committee was 20 to 1 in favor.
3. Unit trusts investing in fixed portfolios of securities
should be permitted to be organized either in open-end
form (as under present law), or in closed-end form.
The use of the closed-end form would permit the public
offering of mortgage-backed and asset-backed pools,
many of which cannot presently be publicly offered
since they cannot comply with the Act. The vote was 17
to 0 in favor.
4. The Act should be amended to remove the current rigid
open-end/closed-end dichotomy so as to permit funds to
redeem on a periodic basis. This would allow the
creation of innovative products and could serve to
reduce closed-end fund discounts. The vote was 21 to 0
in favor.
5. Funds which are limited to institutional investors
should be exempted from various provisions of the Act,
including those relating to governance, capital
structure, redeemability and possibly certain of the
prohibitions on affiliated party transactions. After
experience has been gained in this area, the Commission
should report to Congress on the advisability of
extending some or all of these changes to other types
of funds. The vote was 21 to 0 in favor.
6. Mutual funds should be permitted to make written offers
without prospectus liability, just as broker-dealers
are permitted to make oral offers without such
liability. The vote was 21 to 0 in favor.
7. Mutual fund written advertisements which are subject to
prospectus liability should be permitted to include
purchase applications, so that an investor could
purchase shares directly from an advertisement. The Ad
Hoc Committee voted 12 to 0 to include this proposal,
with its intitial scope limited to money market funds.
The Executive Committee recommended inclusion of all
types of funds.
8. The United States should negotiate treaties with other
nations providing for cross-border sales of investment
company shares, provided there is both adequate
investor protection and equal market access. The vote
was 21 to 0 in favor.
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9. The administrative procedures for obtaining exemptive
relief under Section 6(c) should be liberalized.
Specifically, SEC response to an exemption application
should be required within 90 days, and applicants
should be entitled to rely on relief granted a prior
applicant unless the SEC takes action to the contrary
within 30 days. In addition, the Ad Hoc Committee
voted 12 to 6 in favor of a proposal to amend section
6(c) to permit the SEC to override any provision of the
1940 Act in granting exemptive relief. However, the
Executive Committee recommended that such an amendment
not be proposed.
10. Section 36(b) should be amended to: (1) allow a court
to award the prevailing party the costs of maintaining
or defending the action; (2) require a party to post a
bond sufficient to cover those costs; and (3) change
the burden of proof to "clear and convincing evidence".
The vote in favor of recommendations 1 and 2 was
unanimous; however, the Ad Hoc Committee split 9-9 on
the third recommendation. The Executive Committee
approved all three recommendations.
11. Regulation S-X should follow tax accounting in order to
eliminate differences between book and tax accounting
in financial statement reporting and share valuation.
The vote by a mail ballot sent to the Ad Hoc Committee
after its final meeting was 11 to 4 in favor.
12. Riskless principal transactions should be treated as
agency transactions for purposes of Section 17. The
vote was 16 to 0 in favor.
13. Generally, in the case of series funds, regulatory
provisions should apply to each separate series, except
where it is appropriate to take advantage of economies
of scale or otherwise required by state corporate law.
The vote was unanimously in favor.
14. The current requirement of $100,000 minimum capital for
each investment company should not be changed.
However, an investment adviser to a registered
investment company should be subject to a $1 million
net worth requirement. The vote was 13 to 6 in favor.
15. The SEC and the CFTC should work together to lessen the
possibility of dual registration of a fund as both an
investment company and a commodity pool. The vote was
unanimous in favor.
West Report
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When completed, Steve West's report will be the final
product of the regulatory portion of the Institute's 1990s
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project. Work on this report was begun approximately two years
ago and has continued since that time through a number of
meetings of the Institute's 1990s Ad Hoc Committee. The report
is organized in three major sections: (1) background and
history; (2) options for regulatory reform, and (3)
recommendations of Board of Governors. The recommendations
section has been conformed to the Institute's draft comment
letter.
Matthew P. Fink
Senior Vice President and
General Counsel