April 20, 1993
TO: SEC RULES MEMBERS NO. 37-93
OPERATIONS MEMBERS NO. 20-93
TRANSFER AGENT ADVISORY COMMITTEE NO. 28-93
RE: SEC STAFF LETTER ON DISCLAIMERS OF LIABILITY FOR TELEPHONE
TRANSACTIONS
__________________________________________________________
As you know, the Division of Investment Management has been
reviewing the disclosure required to be included in a fund
prospectus if the fund disclaims liability for acting upon
instructions for telephone exchanges or redemptions. In January
1992, the staff advised registrants that a fund including a
disclaimer of liability in its prospectus must also include a
clear description of the fund's policy with respect to losses
resulting from fraudulent telephone transactions and state that
as a result of the fund's policy the investor will bear the risk
of loss in the event of a fraudulent telephone transaction. In
addition, a statement that the staff of the SEC is currently
reviewing the propriety of such a policy was required to be
included in the fund prospectus.
Yesterday, the Division of Investment Management advised
the Institute as to its position on the propriety of disclaimers
of liability for telephone transactions. In a letter to the
Institute, the Division stated that it now believes "it is
misleading for a fund to attempt to disclaim all liability for
losses resulting from unauthorized or fraudulent telephone
transactions regardless of the precautions the fund takes to
avoid such losses." While the Division does not believe that
funds are, or should be, strictly liable for losses due to
unauthorized telephone transactions, the letter states that funds
"are responsible for exercising reasonable care to prevent such
transactions." The Division's letter states that a mutual fund
that offers investors the ability to engage in telephone
transactions may advise investors that it will not be liable for
following instructions communicated by telephone that it
reasonably believes to be genuine.
Regardless of whether or not a fund includes such a
statement in its prospectus, it must include the following
information in its prospectus and in any other document
describing telephone transactions:
1. a statement as to whether the privilege to initiate
transactions by telephone will be made available to
shareholders automatically or whether the shareholder must
first elect the privilege;
2. a statement to the effect that the fund will employ
reasonable procedures to confirm that instructions
communicated by telephone are genuine, and that if it does
not, it may be liable for any losses due to unauthorized or
fraudulent instructions; and
3. a description of the procedures the fund follows for
transactions initiated by telephone (e.g., requiring a form
of personal identification prior to acting upon
instructions received by telephone, providing written
confirmation of such transactions, recording telephone
instructions).
As a matter of policy, the staff did not take a position with
respect to the adequacy of procedures adopted by funds to protect
shareholders against loss. However, the staff commended the
mutual fund industry for developing certain procedures, in
conjunction with ICI Mutual Insurance Company, to limit losses
due to fraudulent telephone transactions.
A fund should include the foregoing disclosure in its
prospectus at the next possible opportunity but no later than
when it files the post-effective amendment updating its financial
statements pursuant to section 10(a)(3) of the Securities Act.
The Division will not object if a fund files this post-effective
amendment pursuant to rule 485(b) if otherwise qualified to do
so.
* * *
A copy of the Division of Investment Management's letter to
the Institute is attached.
Patricia Louie
Associate Counsel
Attachment