May 23, 1991
TO: CLOSED-END FUND COMMITTEE NO. 11-91
SEC RULES COMMITTEE NO. 29-91
RE: CONGRESS CONSIDERING AMENDMENTS TO SECTION 11(a) OF THE
SECURITIES EXCHANGE ACT
__________________________________________________________
The Subcommittee on Telecommunications and Finance of the
House Committee on Energy and Commerce recently held a hearing to
consider possible amendments to Section 11(a) of the Securities
Exchange Act. Legislation to this effect was introduced in the
Senate earlier this year. Copies of that bill (S.577) and
supporting commentary are attached. The amendments would remove
the provision making it unlawful for any member of a national
securities exchange to effect any transaction on such an exchange
for an account with respect to which such member or an associated
person exercises investment discretion.
Currently, Rule 11a2-2(T), which was adopted by the
Securities and Exchange Commission in 1978, provides a partial
exemption permitting exchange members to handle orders for
affiliated managed accounts provided that, among other things,
trades are executed by an unaffiliated broker. Thus, the
practical effect of Section 11(a) is that exchange members may
effect transactions for their managed accounts so long as trades
are executed on the exchange by an unaffiliated floor broker.
The proposed amendments would remove the requirement that an
unaffiliated floor broker be used to execute these trades. The
proposed amendments are supported by the Securities and Exchange
Commission on the grounds that they would facilitate more
efficient execution of fund portfolio transactions at a lower
cost.
One question that has been raised by some investment
advisers in connection with this legislation is whether it would
create an affirmative obligation on the part of advisers to form
a broker-dealer affiliate for the purpose of executing portfolio
transactions. SEC Commissioner Roberts, in his testimony before
the Telecommunications and Finance Subcommittee, stated that
given the exemption contained in Rule 11a2-2(T), "the elimination
of the managed account provision would seem to have, at most, a
marginal impact on the investment advisers' fiduciary
responsibilities concerning use of affiliated broker-dealers."
Commissioner Roberts noted that "Obtaining the lowest possible
commission rate is only one factor in determining whether a
fiduciary has met its duty of best execution."
As set forth in S.577, the proposed amendments give the SEC
authority to adopt rules requiring as a condition to the ability
to effect transactions for an affiliated managed account that an
exchange member (1) obtain written authorization to effect
transactions on an exchange for an account managed by the member
or an affiliate thereof, and (2) furnish the authorizing person
with an annual statement disclosing the aggregate compensation
received by the exchange member for effecting such transactions.
Similar conditions currently apply under Rule 11a2-2(T), in the
case of transactions where the initiating member or an associated
person retains any compensation.
The fact that the amendments are supported by the SEC is
expected to enhance the likelihood of its eventual enactment. We
will keep you informed on the progress of this proposed
legislation.
Lawrence A. Rogers
Senior Counsel
Attachment