January 4, 1993
TO: SEC RULES COMMITTEE NO. 2-93
INTERNATIONAL COMMITTEE NO. 1-93
RE: RULE 17f-5
__________________________________________________________
As you know, in September the Institute formed an ad hoc
subcommittee of interested members of the SEC Rules Committee and
the International Committee to develop proposed revisions to Rule
17f-5, the rule under the Investment Company Act that permits
fund assets to be held in foreign custody. This project was
undertaken in response to staff recommendations in the May, 1992
Report Protecting Investors: A Half Century of Investment
Company Regulation stating that it would be appropriate to reduce
the role of the board of directors to one of general oversight of
business decisions made by a fund's investment adviser or primary
custodian.
The subcommittee met on September 10 and November 20, and
has developed the attached proposal, which addresses the role of
directors in foreign custody decisions. Under our proposal, the
board of directors would be able to delegate the selection of
foreign custodians and management of the arrangements to the
fund's adviser or U.S. custodian. Delegation would be subject to
a number of conditions designed to ensure the board's ability to
exercise meaningful oversight of the decisions made by these
parties, including board a) approval of the procedures to be used
by the delegate to select an eligible foreign custodian, b)
receipt of representations from its delegate regarding the terms
of the foreign custody contract, the safekeeping procedures to be
used by the foreign custodian, and the existence of
indemnification or insurance to protect against loss of assets,
and c) receipt of reports from its delegate regarding the foreign
custody arrangements.
As noted above, the Institute's submission to the staff
only addresses the issue of board responsibilities under the
rule. Subcommittee members have identified other concerns with
the rule that will be raised either informally with the SEC staff
or in a future submission. The subcommittee will continue to
meet to develop proposed revisions to the rule's definition of
"eligible foreign custodian."
- 1 -
The Institute plans to submit the attached proposal to the
staff no later than January 15, 1993. Please forward any
comments to the undersigned no later than close of business on
Tuesday, January 12. I can be reached at (202) 955-8419 or by
fax at (202) 659-1519.
We will keep you informed of developments.
Angela C. Goelzer
Associate Counsel - International
Attachment