January 15, 1993
TO: OPERATIONS COMMITTEE NO. 1-93
SEC RULES COMMITTEE NO. 5-93
STATE LIAISON COMMITTEE NO. 1-93
TRANSFER AGENT ADVISORY COMMITTEE NO. 4-93
RE: NASAA ISSUES PROPOSED TELEPHONE TRANSACTIONS GUIDELINES FOR
PUBLIC COMMENT
__________________________________________________________
As you may be aware, over the past several months, the
Institute has been meeting and corresponding with the NASAA
Investment Companies Committee regarding the legal basis for
disclosure in mutual fund prospectuses which sets forth the
extent to which the mutual fund and their affiliates will be held
liable for acting upon instructions in connection with telephone
redemptions or exchanges and the various safeguards most funds
have implemented to protect investors against fraudulent
transactions.
Notwithstanding the foregoing efforts, the NASAA Committee
recently published for public comment, the attached proposed
"Guidelines for Telephone Transactions" ("proposed Guidelines").
The proposed Guidelines would require compliance with the
following minimum standards and requirements if a fund disclaims
liability for acting upon telephone instructions:
(1) shareholders must elect the telephone service
option, either in the application or a separate
document;
(2) the document in which the shareholder elects the
telephone service must provide a space for the
shareholder to either accept or reject the
telephone service;
(3) shareholders must be given the opportunity to
select a personal password, identification number,
or other form of identification, utilizing
information that is not found on regular account
statements or in fund correspondence to investors;
(4) the fund must have adopted "reasonable" safety
procedures, including, at a minimum, recording and
maintaining the requests for telephone transactions
and sending written confirmation of all telephone
transactions to shareholders within five business
days; and
(5) the prospectus and the document in which the
shareholder elects the telephone service must
include a statement describing the fund's policy
regarding exculpation from liability in the event
of a fraudulent telephone transaction and a
prominent statement that the investors bears the
risk of loss.
In our previous submissions to the NASAA Committee, the
Institute objected to the requirement whereby shareholders must
elect the telephone service primarily based upon the fact that as
this service has become more widespread, fund groups have found
that many investors who purchase shares of mutual funds expect
that they will be able to make telephone exchanges or
redemptions. For this reason, we noted, many fund groups offer
this service automatically.
The Institute has also objected to the provision which
would grant the shareholder the ability to select a password or
other form of identification. It is the Institute's belief that
such a system could not be executed, monitored or controlled by
the fund's transfer agent or servicing agent. Moreover, even it
if were possible to implement such a system, the costs of doing
so would be prohibitive.
In order to prepare our response to the NASAA Committee's
proposed Guidelines, please provide us with information as to
whether or not you believe a system could be implemented to allow
individual investors to select a password or other form of
identification. In addition, we would also appreciate receiving
information with respect to the following:
(1) cost estimates which would be incurred to offer the
telephone transaction service to an existing base
of shareholders;
(2) general reaction as to how successful a mass
mailing would be to existing shareholders, if such
becomes necessary to re-acquire application type
information in order to confer the telephone
option, including an estimate of the percentage of
responses;
(3) information with respect to the extent to which
problems and/or losses (if any) have occurred as a
result of offering the telephone service;
(4) general experience or reaction of shareholders for
funds which have subsequently offered the telephone
service automatically to shareholders, i.e., have
investors declined to accept the service, used the
service, etc.; and
(5) information as to whether or not the failure to
provide the telephone service would be a
deprivation of a valuable service which enables
shareholders to access their investment in mutual
funds.
It is the Institute's understanding that the NASAA
Committee will be holding a public meeting to discuss the
proposed Guidelines on the afternoon of Monday, March 8, 1993 in
Palm Desert, California. Additional information with respect to
this meeting will be sent as soon as the details have been
finalized by NASAA.
The deadline for written comments on the proposed
Guidelines is tentatively scheduled for March 12, 1993 and should
be sent directly to each member of the NASAA Committee (see
attached list). However, in order to incorporate the above
information and any comments you wish to be included in the
Institute's comment letter, please provide me with the foregoing
information by February 12, 1992. My direct telephone number is
202/955-3517 or you may fax your comments to me at 202/659-1519.
We will keep you advised of developments.
Patricia Louie
Associate Counsel
Attachments