July 9, 1993
TO: OPERATIONS COMMITTEE NO. 23-93
SEC RULES COMMITTEE NO. 61-93
STATE LIAISON COMMITTEE NO. 26-93
TRANSFER AGENT ADVISORY COMMITTEE NO. 38-93
RE: NASAA COMMITTEE ISSUES REVISED PROPOSED TELEPHONE
GUIDELINES FOR PUBLIC COMMENT
__________________________________________________________
As we previously informed you, earlier this year, the NASAA Investment
Companies Committee ("NASAA Committee") issued "Proposed Guidelines for Telephone
Transactions" ("Proposed Guidelines") for public comment which would have
required compliance with "minimum standards and requirements" if a mutual fund
disclaims strict liability for acting upon telephone instructions. The
Institute, and several of its members, submitted written comments opposing
adoption of the Proposed Guidelines and also attended an open meeting of the
NASAA Committee to further express opposition to certain of the minimum standards
and requirements in the Proposed Guidelines because such were inconsistent with
current industry procedure and practice. (See Memoranda to Operations Committee
Nos. 1-93 and 12-93, SEC Rules Committee Nos. 5-93 and 24-93, State Liaison
Committee Nos. 1-93 and 16-93 and Transfer Agent Advisory Committee Nos. 4-93 and
22-93, dated January 15, 1993 and March 19, 1993.)
In response to the written and oral comments received in opposition to the
Proposed Guidelines, the NASAA Committee has revised the Proposed Guidelines
("revised Proposal") and recently re-issued such for public comment. The
Institute is pleased to inform you that the revised Proposal does not include
mandated procedures a fund must comply with if it disclaims liability for acting
upon telephone instructions. In particular, the revised Proposal does not
require shareholder election of telephone services or shareholder selection of
a personal password or identification number.
According to the revised Proposal, mutual funds have a duty to exercise
reasonable care to determine that telephone instructions are genuine. The
revised Proposal also provides that a mutual fund may not disclaim liability for
losses due to unauthorized or fraudulent telephone instructions unless the fund
has established and follows procedures reasonably designed to prevent such
losses. In determining whether or not the procedures established by the fund are
reasonable, the fund may take into account the cost of such procedures and the
risk of loss.
The revised Proposal further provides that a mutual fund may not disclaim
liability for acting upon telephone instructions it reasonably believes to be
genuine unless the fund's prospectus and the document in which the investor
authorized telephone transactions includes the following information:
(1) a description of the fund's policy regarding exculpation from
liability in the event of a fraudulent telephone transaction;
(2) a statement whether the privilege to initiate transactions by
telephone will be made available to shareholders automatically or
upon the investor's affirmative request;
(3) a statement that the investment company will employ reasonable
procedures to confirm that telephone instructions are genuine and
that, if it does not, it may be liable for losses due to
unauthorized or fraudulent transactions;
(4) a description of the procedures the fund follows for telephone
transactions; and
(5) a prominent statement that the investor, as the result of this
policy, bears the risk of loss.
The foregoing provisions are similar to the position the Division of
Investment Management has taken with respect to the propriety of disclaimers of
liability for telephone transactions. As you may recall, the Division has also
taken the position that funds are responsible for exercising reasonable care to
prevent losses due to unauthorized telephone transactions. oreover, the Division
requires certain specified disclosure in a fund prospectus and in any other
document describing transactions initiated by telephone. Although the disclosure
items required by the Division and set forth in the revised Proposal are similar,
the revised Proposal requires that such disclosure be included in the prospectus
and document in which an investor authorizes telephone transactions. (The letter
to the Institute from the Division of Investment Management, dated April 19, 1993
outlining its position on disclaimers was previously distributed but is attached
for your convenience.)
Attached is a copy of the revised Proposal issued by the NASAA Committee.
The comment period on the revised Proposal expires on Friday, August 13, 1993.
Written comments should be mailed to each member of the NASAA Committee as well
as the NASAA General Counsel.
Please provide me with your comments on the revised Proposal no later than
Wednesday, August 4, 1993. My direct telephone number is 202/955-3517.
Patricia Louie
Associate Counsel
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