DRAFT COMMENT LETTER ON PROPOSAL REGARDING PAYMENT OF FUND EXPENSES THROUGH BROKERAGE/SERVICE ARRANGEMENTS

September 23, 1994 TO: ACCOUNTING/TREASURERS COMMITTEE NO. 48-94 SEC RULES COMMITTEE NO. 103-94 RE: DRAFT COMMENT LETTER ON PROPOSAL REGARDING PAYMENT OF FUND EXPENSES THROUGH BROKERAGE/SERVICE ARRANGEMENTS __________________________________________________________ As we previously reported, the Securities and Exchange Commission has proposed rule and form amendments to enhance disclosure by investment companies of expenses paid by broker- dealers in connection with the allocation of a company's brokerage transactions ("brokerage/service arrangements"). (See Memorandum to Accounting/Treasurers Committee No. 44-94, SEC Rules Committee No. 90-94 and Soft Dollars Task Force, dated August 16, 1994.) A meeting of members to discuss this proposal was held at the Institute on September 8, 1994. Attached is a draft comment letter on the proposal, which reflects the members' views discussed at the September 8th meeting. The letter expresses support for the proposed requirement that funds "gross up" expenses paid through brokerage/service arrangements in the statement of operations, fee table, financial highlights table and yield calculation. The letter also supports a requirement that funds make similar adjustments to reflect expenses paid through arrangements, other than brokerage/service arrangements ("related arrangements), where there is an understanding between the parties that such arrangements will be used in lieu of cash payments. The letter opposes the proposal to require funds to disclose in the financial highlights table the average commission rate (in cents per share) paid by the fund because such information is not only meaningless, but could be confusing to investors. The letter also opposes adjusting fund expenses to reflect research and other services permitted under Section 28(e) of the Exchange Act because of the significant complexities and practical difficulties involved in doing so. Finally, the letter requests that the Commission clarify that a board of directors will not have violated its fiduciary duty if a fund does not use brokerage/service arrangements to reduce fund expenses, since the use of such arrangements is but one of many factors that the board might consider in overseeing a fund's brokerage allocation policies. Comments are due to the SEC on the proposal by October 17, 1994. Please provide me with your comments on the draft letter by October 7, 1994. We are particularly interested in your comments on the section dealing with related arrangements (Section II). My direct number is 202/326-5824 and the fax number is 202/326-5828. Amy B.R. Lancellotta Associate Counsel Attachment