May 16, 1991
TO: SEC RULES COMMITTEE NO. 28-91
TRANSFER AGENT ADVISORY COMMITTEE NO. 25-91
RE: INSTITUTE SUBMISSION TO SEC STAFF ON FUND LIABILITY FOR
TELEPHONE TRANSACTIONS
__________________________________________________________
As we recently informed you, the Institute has learned that
the SEC staff is concerned about language in fund prospectuses
relieving the fund or its affiliates of any liability for acting
upon instructions in connection with telephone redemptions or
exchanges. (See Memorandum to SEC Rules Committee No. 11-91,
dated February 6, 1991.) The staff advised the Institute that it
believed that such disclosure may be inconsistent with Section
17(i) of the Investment Company Act and Article 8 of the Uniform
Commercial Code.
In response to the staff's concern, the Institute submitted
the attached memorandum prepared by outside counsel which
concludes that the limitation of liability in connection with
telephone transactions does not violate those provisions of the
Investment Company Act or the UCC. In addition, the Institute
noted in its transmittal letter that most mutual funds have
implemented various safeguards to protect against fraudulent
telephone transactions. The Institute also explained that the
right to conduct telephone transactions is a service that
shareholders have greatly utilized and, increasingly, have come
to expect. Finally, the Institute stated that if funds were not
permitted to limit liability in connection with such
transactions, the liability could shift from those shareholders
who have chosen to avail themselves of telephone privileges to
all shareholders of the fund, since any investor losses borne by
the fund (or increases in its insurance premiums) will reduce its
earnings.
We will keep you informed of developments.
Amy B.R. Lancellotta
Assistant General Counsel
Attachment