May 9, 1994
TO: CLOSED-END FUND MEMBERS NO. 13-94
COMPLIANCE COMMITTEE NO. 9-94
INVESTMENT ADVISER MEMBERS NO. 21-94
SEC RULES MEMBERS NO. 32-94
UNIT INVESTMENT TRUST MEMBERS NO. 16-94
RE: ISSUANCE OF REPORT OF THE ADVISORY GROUP ON PERSONAL
INVESTING
__________________________________________________________
I am pleased to forward the Report of the industry's Advisory
Group on Personal Investing, which was released earlier today,
Monday, May 9th.
As you know, the Advisory Group was formed in February and
charged with reviewing current standards and practices governing
personal investing activities within the investment company
industry. The Advisory Group's Report documents the substantial
success that the Securities and Exchange Commission and the
industry have achieved to date in preventing potential conflicts of
interest in personal investing activities. This success has been
achieved for a number of reasons -- including the high priority
that the industry has accorded to developing effective codes of
ethics, in accordance with the longstanding mandate of the
Investment Company Act and the Commission's regulations.
The Report's recommendations (summarized below) incorporate
the best practices of the industry and recommend that various
substantive restrictions and compliance procedures be adopted
throughout the industry. The recommendations do not envision the
need for changes in federal statute or the Commission's
regulations.
The Advisory Group's Recommendations
A. Statement of General Principles; Applicability
The Report recommends that all codes of ethics contain a
statement of general fiduciary principles that govern personal
investment activities. The Report also recommends that investment
companies, in promulgating their codes of ethics, consider how the
code may be applied in light of the investment company's ethical
obligations, the nature of the investment company's operations, and
the issues potentially raised by transactions in different kinds of
securities and by the personal investment activities of different
categories of personnel.
B. Substantive Recommendations
The Report endorses substantive restrictions as well. In
particular, the Report recommends that all codes:
- flatly prohibit investment personnel from acquiring any
securities in an initial public offering;
- restrict the ability of investment personnel to purchase
privately-offered securities;
- prohibit any access person from executing a securities
transaction on a day during which any investment company
in the complex has a pending "buy" of "sell" order in
that same security until that order is executed or
withdrawn, and prohibit any portfolio manager from buying
or selling a security with at least 7 calendar days
before and after an investment company that he or she
manages trades in that security;
- prohibit all investment personnel from profiting in the
purchase and sale, or sale and purchase, of the same (or
equivalent) securities within 60 calendar days;
- prohibit investment personnel from receiving any gift or
other thing of more than de minimis value from any person
or entity that does business with or on behalf of the
investment company; and
- restrict the ability of investment personnel to serve on
the boards of directors of publicly traded companies.
C. Compliance Procedures
The Report also recommends certain compliance procedures to
implement these restrictions. The Report generally recommends
that:
- codes of ethics require all access persons to "preclear"
personal securitie transactions;
- codes of ethics require all access persons to direct
their brokers to supply to a designated compliance
official duplicate copies of confirmations of all
personal securities transactions and copies of periodic
statements from all securities accounts;
- investment companies implement appropriate procedures to
monitor personal investment activity by access persons
after preclearance has been granted;
- codes of ethics require all investment personnel to
disclose all personal securities holdings upon
commencement of employment and thereafter on an annual
basis;
- codes of ethics require all access persons to certify
annually as to their compliance with the code; and
- investment company management prepare annual reports to
the fund boards concerning the operation of the code and
related procedures.
D. Disclosure
Finally, the Report recommends that investment companies
include in their Prospectuses or, at a minimum, their Statements of
Additional Information, disclosure concerning whether access
persons are permitted to engage in personal securities
transactions, and if so, subject to what general restrictions and
procedures.
* * *
During its deliberations the Advisory Group solicited the
views of all Institute members and surveyed the codes of ethics of
Institute members in order to verify current industry practices and
standards. As during this entire process, we would be interested
in receiving your views on personal investing activities and, in
particular, the Advisory Group's recommendations. In this regard,
we ask that you please submit your views in writing to me or Tom
Selman, Assistant Counsel.
The Advisory Group is urging early action on its
recommendations by the Board of Governors and the industry.
Therefore, the Institute's Board of Governors will confer early
this summer to consider the Advisory Group's recommendations.
We continue to appreciate your guidance as the industry moves
to address this important issue.
Paul Schott Stevens
General Counsel
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